FORM 10-K
Securities and Exchange Commission
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee Required)
For the Fiscal Year Ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to
Commission File Number 001-10684
International Game Technology
(Exact name of registrant as specified in its charter)
Nevada 88-0173041
(State of Incorporation)(I.R.S. Employer Identification No.)
9295 Prototype Drive, Reno, Nevada 89511
(Address of principal executive offices)
Registrant's telephone number, including area code: (702) 448-7777
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassName of Each Exchange on Which Registered
Common Stock, Par Value $.000625 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of November 30, 1997:
$3,052,447,450
The number of shares outstanding of each of the registrant's classes of
common stock, as of November 30, 1997:
113,788,159 shares of Common Stock, $.000625 Par Value
Part III incorporates information by reference from the Registrant's
definitive Proxy Statement to be filed with the Commission within 120 days
after the close of the Registrant's fiscal year.
<PAGE>
Table of Contents
Part I
Page
Item 1. Business 2
Item 2. Properties 23
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 24
Part II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 24
Item 6. Selected Financial Data 25
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 26
Item 8. Consolidated Financial Statements and Supplementary
Data 34
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 61
Part III
Item 10. Directors and Executive Officers of the Registrant 61
Item 11. Executive Compensation 61
Item 12. Security Ownership of Certain Beneficial Owners and
Management 61
Item 13. Certain Relationships and Related Transactions 61
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 62
Signatures 64
<PAGE>
Part I
Item 1. Business
General
International Game Technology (the "Company") was incorporated in
December 1980 to acquire the gaming licensee and operating entity,
IGT, and to facilitate the Company's initial public offering. In
addition to its 100% ownership of IGT, each of the following
corporations is a direct or indirect wholly-owned subsidiary of the
Company: I.G.T. - Argentina S.A. ("IGT-Argentina"); I.G.T.
(Australia) Pty. Limited ("IGT-Australia"); IGT do Brasil Ltda.
("IGT-Brazil"); IGT-Europe B.V. ("IGT-Europe"); IGT-Iceland Ltd.
("IGT-Iceland"); IGT Japan K.K. ("IGT-Japan"); International Game
Technology - Africa (Proprietary) Limited ("IGT-Africa"); and
International Game Technology S.R. Ltda. ("IGT-Peru").
IGT is one of the largest manufacturers of computerized casino
gaming products and proprietary gaming systems in the world. The
Company believes it manufactures the broadest range of
microprocessor-based gaming machines available. The Company also
develops and manufactures wide area progressive systems and systems
which monitor slot machine play and track player activity. In
addition to gaming product sales and leases, the Company has
developed and sells computerized linked proprietary systems to
monitor video lottery terminals and has developed specialized video
lottery terminals for lotteries and other applications. The Company
derives revenues related to the operations of these systems as well
as collects license and franchise fees for the use of the systems.
IGT-Argentina was established in December 1993 and has an office in
Buenos Aires, Argentina to distribute and market gaming products in
Argentina.
IGT-Australia was established in March 1985 and is located in
Sydney, Australia. IGT-Australia manufactures microprocessor-based
gaming products and proprietary systems, and performs engineering,
manufacturing, sales and marketing and distribution operations for
the Australian markets as well as other gaming jurisdictions in the
Southern Hemisphere and Pacific Rim.
IGT-Brazil opened an office in October 1994 in Sao Paulo, Brazil and
subsequently was incorporated in March 1995 to distribute and market
gaming products in Brazil.
IGT-Europe was established in The Netherlands in February 1992 to
distribute and market gaming products in Eastern and Western Europe
and Northern Africa. Prior to providing direct sales, the Company
sold its products in these markets through a distributor.
IGT-Iceland was established in September 1993 to provide system
software, machines, equipment and technical assistance to support
Iceland's video lottery operations.
IGT-Japan was established in July 1990, and in November 1992, opened
an office in Tokyo, Japan. In April 1993, IGT-Japan was approved to
supply Pachisuro gaming machines to the Japanese market.
IGT-Africa opened an office in September 1994 and subsequently was
incorporated in October 1995 to distribute and market gaming
products in Southern Africa. The office is located in Midrand,
South Africa.
IGT-Peru was established in July 1996 and opened an office in Lima,
Peru to support proprietary systems and to distribute and market
gaming products in Peru.
Unless the context indicates otherwise, references to "International
Game Technology," "IGT" or the "Company" include International Game
Technology and its wholly-owned subsidiaries and their subsidiaries.
The principal executive offices of the Company are located at 9295
Prototype Drive, Reno, Nevada 89511; its telephone number is (702)
448-7777.
<PAGE>
Item 1. Business (continued)
The consolidated financial statements include the accounts of the
Company and all of its majority-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated.
For information concerning the revenues, operating results,
identifiable assets, and export sales of the Company's two principal
lines of business and operations by geographic region, see Note 15
of the Notes to Consolidated Financial Statements.
Gaming Products
<TABLE>
The following schedule sets forth revenues derived from product
sales:
<CAPTION>
Fiscal Years Ended September 30,
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Gaming Machines
Reel-type slot $183,094 $254,012 $226,216
Video products 181,266 144,699 125,648
Pachisuro 20,569 16,732 -
Video gaming terminals 11,613 2,185 271
Other Gaming Products 64,608 64,024 64,289
Total Product Sales Revenue $461,150 $481,652 $416,424
</TABLE>
The Company develops its gaming products for both domestic and
international markets. In domestic markets, the Company targets the
traditional casino gaming market and the government-sponsored video
machine market. In international markets, the Company targets casino-
style, gaming-hall, and government-sponsored video gaming markets.
Over the past decade, advancements in gaming machine technology have
attracted a greater number of North American players to slot and
video machines due primarily to higher jackpots and enhanced player
appeal. These improvements have significantly influenced casino
gaming revenues. Generally, annual machine revenues of domestic
casinos exceed revenues from table games.
Internationally, machines have proven to be appealing to players,
but table games represent the majority of revenues. The legalization
of certain casino and machine gaming occurred in Africa, Eastern
Europe and South America during 1997.
The Company was the first to develop computerized video gaming, and
today under the Players Edge Plus trademark, sells a variety of
computerized video gaming machines. The machines include video
poker and "blackjack" products in the upright, slant-top and drop-in
bar models. The Players Edge Plus line is also available in slant-
top keno, dual screen keno, bingo, large screen video poker and
video slots. Players Edge Plus machines offer player appeal,
functionality to the operator with features such as multilevel
progressives, imbedded and side-mount bill acceptors, enhanced sound
packages, imbedded progressive meters and data communication
devices. These games now offer an extensive line of partitioned
software which allows for faster game development, gaming authority
approval, and overall customer convenience.
<PAGE>
Item 1. Business (continued)
The Company's innovations in slot and video technology have
increased the machines' earning potential by improving the ease and
speed of play, using local game preferences, enhancing entertainment
via sound, bonus features and overall aesthetics, and decreasing
down-time through improved reliability and added service features.
All new gaming machines offer a wide variety of games, innovative
designs, sophisticated security features, self-diagnostic
capabilities, and various accounting and data retention functions.
The Company's engineering and design staff continually provide
technological improvements and ongoing game development. The
Company has obtained numerous patents on various aspects of its
video and reel-type gaming machines and systems. The visual aspects
of the product are upgraded and customized by the Company's graphic
design and silkscreen departments.
IGT also offers a complete line of spinning reel slot machines sold
under the trademark S-Plus. The S-Plus series slot machines use an
advanced microprocessor system that accommodates several progressive
link configurations, enhanced audit trail functions, selection of
game software and optional side-mount or imbedded bill acceptors. S-
Plus machines can run existing S-slot programs or the latest
partitioned software which facilitates program updates. A game
change can occur quickly by selecting a new program chip from IGT's
game library and by changing the glass and reel strips. The S-Plus
machines are manufactured in various sizes and colors and are
offered in several designs including upright and slant-top.
In the video product line, IGT offers the Game King (also named
Winner's Choice in video gaming territories) which is marketed in
both the traditional casino gaming and government-sponsored markets.
The Reduced Instruction Set Computer ("RISC") processor-based
technology of the Game King uses Intel's Multimedia and Superscalar
processor, the 80960. The Game King product line offers interactive
game play features and graphics in a highly secure and reliable
multi-game package. The internal architecture offers customers
improved game flexibility and expansion capabilities. The Game King
also offers improved security features including silicon signature
chips in all PC boards, enhanced door monitoring, and extensive
event log with time and date stamp available. The Winner's Choice
product is operational in government-sponsored jurisdictions of
Delaware, Oregon, Rhode Island, Sweden, West Virginia, and the
United States Army. Game King is approved and marketed in the
traditional gaming jurisdictions of Australia, Colorado, Iowa,
Louisiana, Mississippi, Missouri, Montana, several Native American
markets, Nevada, New Jersey and South Dakota.
The Company began a field trial of its new VisionT series slot
machine in September 1997. The VisionT series slot integrates
traditional spinning-reel games with a state-of-the-art liquid
crystal display ("LCD") to graphically communicate bonus features,
game prompts and marketing messages. While the VisionT series looks
and feels like the industry standard S-Plus slot machine, it
provides enhanced functionality to the casino operator and the
player. Utilizing an advanced 80960 processor to provide more
application-rich programs, casino operators have increased game
flexibility and customization opportunities with the VisionT series.
The VisionT series is currently approved for sale to Native American
casinos in ten states as well as casinos in Colorado, Illinois,
Iowa, Missouri, New Jersey and South Dakota, and is awaiting
regulatory approval in five other jurisdictions including three
riverboat states, Nevada, and Nova Scotia, Canada.
The Company manufactures and markets video gaming terminals ("VGTs")
for government-sponsored gaming programs. The VGTs are similar to
the Company's video gaming machines, although the method of prize
payments may differ. After inserting money in a VGT, the player is
issued credit and plays the machine as a traditional video machine.
Player wagers are deducted from the credit meter and winnings are
added instead of coins being dropped into a tray. Upon completion
of play, the VGT prints out a ticket showing the remaining amounts
and value of credit. The ticket is redeemable for cash by a clerk or
teller in the retail establishment. VGTs are typically linked to a
central computer for accounting and security purposes and are
monitored by state lotteries or other government agencies.
<PAGE>
Item 1. Business (continued)
As an enhancement to its core machine business, IGT created the
Interactive Game Division in August 1996 to develop a broader
variety of gaming machines. This division pursues products that
offer new, different, and more advanced types of games and explores
uses for new technologies. It is also expected to provide the means
for the Company to introduce certain of its international products
into domestic markets. While interactive games will be developed
under all of the product lines, the primary development is occurring
on the Game King video platform.
In September 1996, IGT and Dreamport Inc., an indirect subsidiary of
GTECH Holdings Corporation ("GTECH"), formed a joint venture
relationship named IGDreamport. IGDreamport plans to pursue the
development, improvement, and marketing of video lottery technology,
games and services in order to expand the product offerings
available to government-sponsored lotteries worldwide.
In July of 1997, IGT and Barcrest Limited of Lancashire, England,
entered into a strategic alliance under which the parties plan to
produce specialty products for the gaming industry. The specialty
products will be based on IGT's S-Plus spinning reel gaming
machines, with bonus game displays developed by Barcrest. This new
line of S-Plus reel spinning slots is a product of the Company's
Interactive Game Division.
IGT has also begun marketing a new 14 module player tracking system,
IGT Gaming System ("IGS"), which supports the casinos' control and
information needs and replaces IGT's Smart Marketing and Revenue
Tracking ("SMART") system that has been offered in the past. IGS
uses the player tracking components and bonusing software of Acres
Gaming Inc., a gaming company specializing in the development of
ancillary gaming products, to provide the casino operator with an
enhanced ability to manage marketing, slot bonusing, pit cage and
credit, and slot management, plus specialized areas such as bus
scheduling and events management.
Markets for Gaming Products
Overview
Demand for the Company's products comes principally from four
sources: the establishment of new gaming jurisdictions; expansions of
casinos; additions of new casinos within existing gaming markets; and
the replacement of older machines with newer machines with higher
levels of player appeal. Historically, gaming machines have a
mechanical life of approximately 10 years. However, in established
markets, such as Nevada, gaming machines are replaced on average
between three to seven years. Replacement occurs as a result of
technological advances, new designs, improvements in visual
characteristics, the development of new games, general wear and tear
from use, and the evolving preference of casino patrons.
IGT has benefited from the significant expansion of legalized gaming.
As part of this expansion, casino-style gaming has become an
increasingly important component of the "leisure time" industry. The
increased legalization and popularity of gaming has presented growth
opportunities for the Company both in the domestic market (North
America) and in the emerging international market. Specifically, in
the past few years, the introduction of riverboat gaming in the
Midwest U.S., the expansion of Native American Class III casino
gaming, the growth in the Nevada market, the growth in Canadian
markets and the continued development of government-sponsored casino
gaming have presented expanded markets for gaming machines.
While the Company anticipates future growth in the gaming industry,
the rate of growth in the North American marketplace has diminished
since the substantial growth experienced in the early 1990's. During
fiscal 1997, several states expressed interest in introducing new
gaming legislation. Few of these states made significant legislative
progress toward this goal. Several states may again pursue approval
in 1998. The further expansion of casino-style gaming in these and
any other potential jurisdictions will continue to be the subject of
intense public debate with legalization typically requiring a public
referendum or other legislative action. In addition, any favorable
public referendum or legislative action may be the subject of legal
challenges.
<PAGE>
Item 1. Business (continued)
These factors have and will continue to influence and potentially
delay the timing and opening of casino-style gaming in new
jurisdictions. The Company cannot predict the rate at which new
domestic and international markets will develop, and any slowdown or
delay in the growth of new markets may adversely affect the Company's
future results.
North American Markets
Nevada
The most established North American gaming markets are Nevada and
Atlantic City. Nevada is both the oldest and largest market for the
Company's products with an installed base of approximately 197,200
gaming machines. Of these machines, the Company estimates it
manufactured 155,800.
Over the past several years, demand for gaming products in this
market has been influenced by the construction of new casino
properties, the expansion or refurbishment of existing operations and
replacement of gaming machines without imbedded bill acceptors. In
fiscal 1997, the Company provided gaming machines to four significant
new casinos: Main Street Station; New York, New York; Sunset Station
and The Orleans, all in Las Vegas, Nevada. In addition, several other
Nevada properties to which the Company sold gaming machines underwent
smaller-scale expansions in fiscal 1997. The Company had unit sales
of 21,400 machines to the Nevada market during fiscal 1997, as
compared to 21,500 in fiscal 1996.
Two major new casinos are currently under construction in Las Vegas,
the Bellagio and the Reserve Hotel and Casino, and are scheduled to
open in calendar 1998. The Company, at present, has commitments for
product purchases from the Reserve Hotel and Casino. Several new
casinos and expansions in Nevada have been announced including the
significant properties of Aladdin, Paris Resort, Project Paradise and
the Venetian Hotel and Casino. The Company does not have commitments
for product purchases from these casinos and, due to timing of the
scheduled openings, does not expect to make sales to these properties
in fiscal 1998.
The Company received replacement orders in fiscal 1997 from various
Nevada casinos. In the future, the Company expects that replacement
demand will be influenced by the introduction of technological
changes to traditional gaming machines along with advanced
entertainment and bonusing features, such as those included in the
VisionT series. The level of demand cannot, however, be predicted.
Demand for these products is dependent, in part, upon the
competitiveness of casinos and the willingness of casinos to incur
the costs associated with replacing existing gaming machines with new
machines.
Atlantic City
Atlantic City is the second-largest gaming market in the Northern
Hemisphere. The installed base for the Atlantic City market is
approximately 34,700 gaming machines. Of these machines, the Company
estimates it manufactured 18,000. In April 1996, the New Jersey
Casino Control Commission repealed regulations that limited to 50%
the share of gaming machines that any one manufacturer could supply
to an Atlantic City casino. As a result, the Company has increased
its market share to more than 50%. In fiscal 1997, several casinos
in Atlantic City underwent expansions or made machine upgrades,
including Bally Park Place, Caesars, Harrah's Showboat and Tropicana.
The Company, through its distributor Atlantic City Coin & Slot
Service Company ("ACCS"), sold approximately 4,800 machines in fiscal
1997 as compared to 5,300 in fiscal 1996. ACCS sells to both New
Jersey casinos and Caribbean casinos. Of the 4,800 machines sold in
1997, approximately 3,500 were placed in the New Jersey market and
1,300 were placed in the Caribbean market. The relationship with
ACCS is expected to end upon the expiration of its current
distributorship agreement in June 1998. Thereafter, the Company
intends to establish a sales office in New Jersey to service this
market in the future and will service Puerto Rico and the Caribbean
market from its Florida office.
<PAGE>
Item 1. Business (continued)
In March 1996, Mirage Resorts, Inc. announced that it had entered
into an agreement with Atlantic City to develop 178 acres of land in
the marina area of Atlantic City known as the H tract. The accessway
to the Marina district was approved in 1997. Mirage Resorts is in
the approval process for Le Jardin, a large-scale casino project with
tentative partners Circus Circus Enterprises, Inc. and Boyd Gaming
Corporation. This opening is projected for 2001 and would be the
first newly constructed casino in the Atlantic City gaming market
since the opening of the Trump Taj Mahal in April 1990. The new
casino would be a substantial competitive addition to the Atlantic
City marketplace. MGM Grand has also purchased land for development
in the Atlantic City market. If these projects are completed, other
Atlantic City casinos may make machine upgrades to remain
competitive. The Company cannot predict whether these projects will
be completed or the timing of completion and does not have
commitments for product purchases with these casinos. As in Nevada,
the Company anticipates continued future demand for replacement
machines in Atlantic City, but the level of demand cannot be
predicted.
Riverboat Gaming
Riverboat-style gaming began in Iowa during 1991 and as of September
1997 was operating in six states: Illinois, Indiana, Iowa, Louisiana,
Mississippi, and Missouri. Of the nine licenses issued in Indiana,
five riverboats were opened in fiscal 1996 and three riverboats were
opened in fiscal 1997. The ninth riverboat is expected to open in
fiscal 1998. Two additional licenses may be granted in fiscal 1998.
At the end of fiscal 1997, the riverboat gaming installed base was
estimated at 84,500 games, operating on more than 85 riverboats. Of
these machines, the Company estimates it manufactured 70,300. In
fiscal 1997, the Company delivered gaming machines to the new casino
operations of the Argosy, Blue Chip Casino, Empress II and Majestic
Star in Indiana; Catfish Bend in Iowa; Horseshoe Bossier City in
Louisiana; Horseshoe Biloxi in Mississippi; and Harrah's St. Louis,
Players, Showboat and Station Casino Kansas City in Missouri. The
Company delivered 9,400 gaming machines to riverboat casino operators
during fiscal 1997 as compared to 15,000 in fiscal 1996.
The growth rate in the riverboat gaming market is expected to decline
compared to fiscal 1997; however, several major riverboat operations
are scheduled to open throughout fiscal 1998 and 1999. These
properties include Beau Rivage in Mississippi, Circus Bay St. Louis
in Missouri and Hollywood Casino in Shreveport, Louisiana. The
Company cannot predict the timing of the opening of new riverboats
and the Company does not have commitments for product purchases
related to these riverboats.
Native American Gaming
Casino-style gaming continued to expand on Native American lands
during fiscal 1997. Native American gaming is regulated under the
Indian Gaming Regulatory Act of 1988 which permits specific types of
gaming. Pursuant to these regulations, permissible gaming devices
are denoted as "Class III Gaming" which requires, as a condition to
implementation, that the Native American tribe and the state
government in which the Native American lands are located enter into
a compact governing the terms of the proposed gaming. The Company
places machines only with Native American tribes who have negotiated
compacts with their respective states and have received approval by
the U.S. Department of the Interior.
The Company, through its distributor Sodak Gaming, Inc. ("Sodak"),
began selling machines to authorized Native American casinos in 1990.
The Company has either directly or through its distributor sold
machines to Native American casinos in the following 17 states:
Arizona, Colorado, Connecticut, Iowa, Kansas, Louisiana, Michigan,
Minnesota, Mississippi, Montana, Nevada, New Mexico, North Carolina,
North Dakota, Oregon, South Dakota and Wisconsin. Additionally,
Class III compacts are either under consideration, or there has been
ongoing litigation between Native American tribes and the state
governments, in several other states. The favorable resolution and
approval of compacts in any of these states would provide additional
market opportunities for the Company's products. The Company cannot,
however, predict when and whether such approvals will occur. In
1997, 11 compacts in the State of New Mexico became effective.
<PAGE>
Item 1. Business (continued)
At September 30, 1997, the installed base of Class III gaming
machines within Native American operations was approximately 78,700
gaming machines. Of these machines, the Company estimates it
manufactured and sold through its distributor 57,700 machines. In
fiscal 1997, the Company sold gaming machines in the following tribal
locations: Cypress Bayou, Harrah's in Kansas; Turtle Creek in
Michigan; Harrah's of the Eastern Band of Cherokees in North
Carolina; and Seven Feathers in Oregon. The Company sold
approximately 7,000 gaming machines to approved Native American
casinos in fiscal 1997 as compared to 13,200 in fiscal 1996.
Racetrack Gaming
The Company provides gaming machines through direct sales and leasing
to government-sponsored and private racetracks in Delaware, Iowa,
Rhode Island and West Virginia. In fiscal 1997, the Company sold
approximately 800 gaming machines to the racetracks as compared to
500 in fiscal 1996.
In fiscal 1995, Iowa legalized gaming machines at the various
racetrack facilities within the state. Approximately 2,800 gaming
machines were installed among the Iowa racetracks of Bluff's Run,
Dubuque Greyhound Park and Prairie Meadows. Of these machines, the
Company estimates it manufactured 2,400.
Currently in West Virginia, four racetracks have legalized gambling.
These racetracks include Charles Town Park and Raceway, Mountaineer
Park, Tri State Greyhound Park and Wheeling Downs. In fiscal 1997,
West Virginia added 800 gaming machines to the racetracks, all of
which were manufactured by the Company. The Company manufactured
approximately 1,400 of the total 2,850 gaming machines at the
racetracks in West Virginia.
The Company also recognizes lease revenue from machines installed at
racetrack facilities in Delaware, Rhode Island and West Virginia as
discussed in the "Lease and Other Gaming Operations" section.
In 1997, New Mexico passed legislation allowing gaming at Native
American casinos, racetracks, and fraternal organizations within the
state. Along with the existing casinos, six racetracks would each
be allowed to operate 300 gaming machines and approximately 160
fraternal organizations would each be allowed to operate 15 gaming
machines. Gaming at the racetracks and fraternal organizations is
pending the funding of the regulatory agency. The legislative
process is outside the control of the Company and the Company cannot
predict the funding of the regulatory agency or the timing and
opening of gaming at the racetracks and fraternal organizations in
New Mexico. The Company does not have commitments for product
purchases in this market.
Maryland, Massachusetts, New Hampshire and Pennsylvania are
considering the addition of gaming machines to racetrack facilities.
Future expansion is anticipated to continue in the pari-mutuel
wagering industry, however, the rate and the level of expansion is
dependent upon enabling legislation passed by the appropriate state
legislatures and cannot be predicted by the Company.
Canada
Government-sponsored gaming in Canada is also a market for the
Company's gaming products. The Company's video gaming terminals are
currently operational in the Canadian provinces of Alberta, Manitoba,
New Brunswick, Newfoundland, Nova Scotia, Ontario, Prince Edward
Island, Quebec and Saskatchewan. The Company has supplied its
Security Accounting Management System ("SAMS") central computer in
Manitoba. In fiscal 1997, the Company sold 2,600 video gaming
terminals in the Canadian government-sponsored marketplace compared
to approximately 1,400 units in fiscal 1996. The Company also
provides video gaming terminals to government-sponsored gaming in
Louisiana, Oregon and South Dakota. IGT has manufactured
approximately 25,600 of the estimated 127,800 total video gaming
terminals installed in North America.
<PAGE>
Item 1. Business (continued)
In October 1997, the Ontario Lottery Corporation ("OLC") issued four
RFP's related to their new video lottery program which is expected to
place over 13,000 video lottery terminals ("VLT's") in 44 new
charitable casinos and approximately eight racetracks. The OLC's
long-term plans include placing VLT's in Ontario's bars and taverns.
In November 1997, IGDreamport submitted a proposal which would
provide the Game King product and a central system to the charitable
casinos. The Company cannot predict the OLC's decision related to
this RFP.
In addition to government-sponsored video gaming, various Canadian
provincial governments have approved and are operating casino-style
gaming. The following provinces have casino operations: Alberta,
British Columbia, Manitoba, Nova Scotia, Ontario, Quebec and
Saskatchewan. At the end of fiscal 1997, the total installed base of
gaming machines in the Canadian provinces was approximately 16,600
gaming machines. Of these machines, the Company estimates it
manufactured 10,000. In fiscal 1997, the Company sold approximately
3,800 gaming machines in the Canadian marketplace as compared to
2,300 in fiscal 1996.
In 1997, the province of British Columbia installed spinning-reel
slot machines in the existing 17 charitable casinos through the
British Columbia Lottery Corporation ("BCLC"). BCLC issued system
and slot requests for proposals ("RFP") in May 1997. IGT was awarded
900 of the first 1,300 machines and shipped these machines in fiscal
1997. The Company currently has orders for 900 additional machines in
the charitable casino market for fiscal 1998. The British Columbia
market potential could increase in the future with the proposed
addition of gaming at five racetracks, on ten ferry boats, and at
seven destination resorts. The Company cannot predict the completion
of these projects or the level or timing of demand in this market.
Other North American Markets
Colorado and South Dakota offer limited stakes casino-style gaming
throughout specified historic mining towns. Colorado currently has an
installed base of nearly 13,200 gaming machines in the cities of
Black Hawk, Central City and Cripple Creek. Of these gaming
machines, IGT estimates it manufactured 11,800. In fiscal 1997, the
Company sold approximately 700 gaming machines to Colorado casino
operators as compared to 1,500 in fiscal 1996. South Dakota has an
installed gaming machine base of nearly 2,400 machines in Deadwood.
Of these machines, IGT estimates it manufactured 1,800.
The Company also markets its machine products to international
cruise ship operators. The Company estimates that the cruise ship
market has approximately 15,300 gaming machines in place. Of these
machines, the Company estimates it manufactured 10,800. In fiscal
1997, the Company sold approximately 1,900 gaming machines to
various licensed cruise ship operators as compared to 1,400 in
fiscal 1996.
Gaming legislation was passed in Detroit, Michigan in November 1996.
The licenses were awarded to Detroit Entertainment, LLC, a joint
venture of Atwater Casino Group and Circus Circus Enterprises;
Greektown Casino LLC, and MGM Grand, Inc. The Company cannot
predict the eventual timing of the new casinos.
International Markets
Demand for casino-style gaming products also exists in international
jurisdictions. Traditionally, gaming in international markets has
consisted of both casino-style gaming, private clubs and, in some
countries, smaller-scale gaming halls. International casinos
commonly target the tourist population and are usually located in
large urban areas or designated tourist locations. The number of
large-scale casinos per jurisdiction may be limited by the
government. The casinos may be privately-owned, government-owned or
a joint venture between the state and a private operator.
Frequently, the investment in these facilities is significant and
therefore often managed by world-wide casino operators. In addition,
there are corporate and charity-run operations.
<PAGE>
Item 1. Business (continued)
The number of machines within gaming halls is usually fewer than what
is found in casinos and it is common to find numerous halls located
throughout a jurisdiction. The types of games within the halls can
include amusement-with-prize machines ("AWP") as well as gaming
machines. In some jurisdictions, the machines pay out in the form of
tickets, vouchers or tokens, rather than actual coins. These gaming
establishments are usually privately owned and, due to the smaller
size of the locations, the investment required is significantly less
than that for casino developments.
Australia and New Zealand
The Australian market is the most established jurisdiction for gaming
products outside of North America. Casino-style gaming has existed
in Australia since 1973 and in the pub and club market since 1956.
Currently, a total of 14 casinos operate in Australia within the
states of New South Wales, the Northern Territory, Queensland, South
Australia, Tasmania, Victoria, and Western Australia. The installed
base for the Australian market (including New Zealand) is
approximately 160,000 gaming machines in legalized casinos, pubs and
clubs. The Company began selling gaming machines in Australia in
1986 and of the installed machine base in the Australia/New Zealand
market, the Company estimates it manufactured 31,000. In fiscal
1997, the Company had sales of approximately 7,700 gaming machines in
Australia as compared to 6,000 gaming machines in fiscal 1996.
The state of New South Wales is the largest market in Australia for
gaming machines, with an estimated total of 83,000 gaming machines in
1,800 pubs and 1,500 not-for-profit clubs. The permanent Sydney
Harbor casino, Star City, which opened in November 1997, has
approximately 1,500 machines, of which the Company sold 560 machines
at the end of fiscal 1997. The Crown Casino in Melbourne opened in
May 1997 with 2,500 machines, of which the Company sold 400 machines.
In addition to New South Wales, several Australian jurisdictions have
implemented or are considering the legalization or expansion of
gaming operations within their borders. In calendar 1996, the Reef
Casino at Cairns and the Treasury Casino in Brisbane opened in
Queensland. In fiscal 1997, the Government of the Northern Territory
began the expansion of gaming machine operations into clubs and
hotels. The Government of Tasmania began a similar expansion of
gaming into clubs and hotels in the island state during calendar
1997. Western Australia is currently considering the introduction of
gaming to the club and hotel markets along the same lines as the
South Australian market with a limited number of machines per venue.
Victoria has 27,500 machines in place at present with a proposal to
state government to increase this to 30,000.
Gaming also exists in New Zealand in the form of casino-style gaming
and gaming in pubs and clubs. Casino-style gaming was introduced in
New Zealand during fiscal 1995, with the commencement of operations
at the Christchurch Casino. In August 1996, new regulations, which
considerably relaxed maximum machine numbers and prize levels for
gaming machines in pubs and clubs, increased the sales potential in
this market. As a result, sales of 2,300 machines were achieved for
fiscal 1997. Of these, 2,200 were sold in the pub and club market
compared to 900 units for the previous year. The installed base for
all sectors of the New Zealand market is approximately 13,000 gaming
machines. Of these machines, the Company estimates that
approximately 6,200 were manufactured by the Company. The Company
cannot predict the timing or level of demand in this market in the
future.
Europe, Middle East and North Africa
The European, Middle Eastern and North African markets are serviced
by the Company's sales and distribution center located in The
Netherlands. The Company has had a direct sales presence in Europe
since February 1992. Since that time, increasing customer awareness
of product availability combined with service and training
assistance, has contributed to improvements in the Company's share of
this market. The European market is a unique market as many
countries also have established AWP machines which provide
competition for the casino-style gaming machines.
<PAGE>
Item 1. Business (continued)
The Company estimates that throughout Europe, the Middle East and
North Africa, the market base of legally installed gaming machines is
in excess of 79,000. Of these machines, the Company estimates it
manufactured 17,500. In fiscal 1997, the Company made sales of 2,800
machines in this market, compared to 4,500 machines in fiscal 1996.
The majority of these machines were sold to casino operations in
Austria, France, Poland, Tunizia and other European casino
jurisdictions. The Company also continued to make sales of video
gaming terminals for a linked system in Sweden. Changes in
governments and policies in Turkey and Greece negatively impacted
sales in 1997. The future demand in these areas is dependent on
political and regulatory factors outside the Company's control.
During fiscal 1993, the Company completed an agreement with the
University of Iceland Lottery ("UIL") to supply video terminals and a
central system linking the video terminals. The central system
incorporates a progressive jackpot feature. The Iceland system,
managed by the UIL, began operating in December 1993 and continues to
operate with 360 VLT's manufactured by the Company. In fiscal 1997,
this agreement was extended through fiscal 2000.
The Company also provided video gaming terminals and a central
system to Norges Handikapforbund, Norway in fiscal 1995, and
participates in the revenue generated by these machines. At the end
of September 1997, approximately 140 terminals were fully
operational.
Africa
The Company sells its products in several legalized jurisdictions in
Africa including Botswana, Kenya, Lesotho, Namibia and South Africa.
In 1996, the Government of South Africa took steps to expand
legalized gaming with the passing of national legislation. The
gaming legislation in South Africa permits the nine provinces to
license a total of 40 casinos. The market is divided by province,
with each of the nine provinces determining the timing and granting
of the licenses. There are currently 17 licensed casinos in the
country, although it is anticipated that at least eight of the
existing operations will be required to close under the provisions of
the National Gambling Act. Therefore, the Company anticipates that
as many as 31 new casinos will be licensed in the country over the
next several years. In response to these developments, the Company
established IGT-Africa with a sales and service office in Midrand,
Gauteng, South Africa. The legislative process is outside the
control of the Company and the Company cannot predict the approval of
gaming in these new markets.
All of the nine South African provinces are in various stages of
implementing the provisions of the National Gambling Act. The
Province of Mpumalanga has awarded three casino licenses out of the
four allocated. The Gauteng Province is expected to issue casino
licenses in early 1998. It is not known yet if it will issue all six
licenses allocated to this province. All of the other provinces have
enacted gaming legislation and are either in the process of
establishing gaming boards, or have already done so. The Company
submitted an application for a manufacturing license in the Western
Cape Province in October 1997. The Company cannot predict the timing
of the licensing in these provinces.
The National Gambling Act and most of the provincial gambling bills
also authorize limited payout gaming machines ("LPM") (limited in
number, wager and payout) in other venues such as bars, taverns, and
social or sports clubs. Licensing will be available for operators in
both casino style and LPM gaming. All suppliers must be licensed and
meet technical specifications in the gaming markets. The specific
limitations will be defined in each province's regulations.
<PAGE>
Item 1. Business (continued)
During fiscal 1997, the Company made sales in this market of
approximately 1,100 gaming machines, compared to 300 units in fiscal
1996. Of the amount sold in 1997, 700 machines were sold in
Mpumalanga, the first province to award licenses based on the new
legislation. The Company is pursuing additional sales of gaming
machines to the new facilities contemplated under the South African
gaming legislation.
Japan
The Japanese market consists of 800,000 gaming machines in 17,000
gaming halls. The Company estimates that no one manufacturer has
more than 20% of this installed base. In November 1995, IGT-Japan
became the first non-Japanese company to be admitted as a full member
to Japan's 21-member Nichidenkyo, an association of pachisuro
manufacturers. IGT-Japan's membership status gives the Company the
opportunity to compete for a share of Japan's pachisuro machine
replacement market, estimated at approximately 400,000 machines
annually. In response, IGT-Japan has established a regional
distribution network to market the Company's pachisuro machines.
During the past two years, the Company increased its investment in
design, sales and support staff of the IGT-Japan office to pursue the
Japanese market. The Company sold approximately 9,500 units in
fiscal 1997 compared to 7,200 units in 1996. Sales in the Japanese
market are driven by the introduction of new games, with each new
game having a sales life of four to five months. Therefore, success
in this market is dependent on the ability to regularly introduce new
games and the popularity of each new game introduced. IGT has
received approval for its next game from the Security Electronics and
Communication Technology Agency ("SECTA"). The Company plans to
release this machine at the beginning of the second quarter of fiscal
1998. In an effort to continually improve and enhance its products,
the Company has submitted another new game to SECTA for approval and
continues to make enhancements on upcoming models.
Latin America
The Company has established offices in Buenos Aires, Argentina; Sao
Paulo, Brazil; and Lima, Peru to market its products. Casino gaming
is currently legal in some form in Argentina, Chile, Colombia, Costa
Rica, Ecuador, Paraguay, Peru, and Uruguay. During fiscal 1997, the
Company sold approximately 4,000 machines in the Latin American
market as compared to approximately 4,800 machines in fiscal 1996.
Venezuela has recently enacted a law to control casinos, bingo
parlors and slot machines. Regulations are expected to be in place
by the end of fiscal 1998. The Company has no control over the
outcome or timing of these regulations. IGT has entered into an
exclusive distributorship agreement with a third party covering the
Venezuela market.
The Company's agreement with Sodak entered into in 1996 to supply
video gaming machines for Sodak's agreement with the CBF-Brazilian
Soccer Federation did not result in sales during fiscal 1997.
Regulations have not been finalized in Rio de Janeiro or Sao Paulo,
the two states intended for initial implementation. Future sales and
the continuance of this agreement are dependent on the finalization
of regulations in those states.
The Company is exploring additional business opportunities within
approved jurisdictions in the Latin American marketplace. The pace
and timing of developments within these markets cannot, however, be
predicted. In response to the developing Latin American marketplace,
the Company has customized existing products for the Latin American
market by translating more than 50 games into Spanish and Portuguese
and by adapting graphics and language to local cultures.
<PAGE>
Item 1. Business (continued)
Gaming Operations
<TABLE>
The following table shows the revenues recorded from gaming
operations.
<CAPTION>
Years Ended September 30,
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Proprietary Systems $253,953 $234,859 $191,607
Lease and Other Gaming Operations 28,867 16,941 12,755
Total $282,820 $251,800 $204,362
</TABLE>
Proprietary Systems
The Company has developed and introduced electronically-linked, inter-
casino proprietary gaming machine systems for more than ten years.
These systems link gaming machines in various casinos to a central
computer. The systems build a large "progressive" jackpot which
increases with every wager made throughout the system. The systems
are designed to increase gaming machine play for participating
casinos by giving players the opportunity to win jackpots
substantially larger than those available from gaming machines which
are not linked to a progressive system. The linked progressive
systems developed and operated by the Company are collectively
referred to as MegaJackpotsT.
In Nevada, 13 systems are operated under the names Dollars Deluxe,
Fabulous Fifties, Five Deck Frenzy, High Rollers, Megabucks, Nevada
Nickels, Nickels Deluxe, Quartermania, Quarters Deluxe, Super
Megabucks, Totem Pole, Wheel of Fortuner Dollars and Wheel of
Fortuner Quarters. Of these systems, five were introduced into the
market during fiscal 1997. As of September 30, 1997, there were
5,100 gaming machines linked to these systems.
In Atlantic City, New Jersey, 10 systems operate under the names
Dollars Deluxe, Fabulous Fifties, High Rollers, Megabucks, Megapoker,
Pokermania, Quartermania, Quarters Deluxe, Wheel of Fortuner Dollars
and Wheel of Fortuner Quarters. These systems are operated by a
trust managed by representatives from participating casinos. A total
of 2,400 gaming machines are linked to these systems.
In Mississippi, 11 systems are operated under the names Dollars
Deluxe, Fabulous Fifties, High Rollers, Megabucks, Mississippi
Nickels, Nickels Deluxe, Pokermania, Quartermania, Quarters Deluxe,
Wheel of Fortuner Dollars and Wheel of Fortuner Quarters. A total of
1,000 gaming machines are linked to these systems.
In Colorado, three systems are operated under the names Colorado
Nickels, Megabucks and Quartermania with a total of 360 gaming
machines linked to these systems.
In Louisiana, seven systems are operated under the names Fabulous
Fifties, High Rollers, Louisiana Nickels, Megabucks, Quartermania,
Wheel of Fortuner Dollars and Wheel of Fortuner Quarters. A total of
400 gaming machines are linked to these systems.
In Native American casinos, eight systems are operated under the
names Dollars Deluxe, Fabulous Fifties, High Rollers, Megabucks,
Nickelmania, Quartermania, Wheel of Fortuner Dollars and Wheel of
Gold. Separate Megabucks, Quartermania and Wheel of Fortuner Dollars
systems operate in Arizona. Approximately 1,600 machines operate on
these systems in Arizona, Connecticut, Iowa, Kansas, Louisiana,
Michigan, Minnesota, New Mexico, North Dakota, Oregon, South Dakota,
and Wisconsin. The systems in Native American casinos began operating
in August 1994.
<PAGE>
Item 1. Business (continued)
In Missouri, nine systems are operated under the names Dollars
Deluxe, Fabulous Fifties, High Rollers, Megabucks, Nickels Deluxe,
Quartermania, Quarters Deluxe, Wheel of Fortuner Dollars and Wheel of
Gold. A total of 310 gaming machines are linked to these systems.
The systems in Missouri began operating in June 1997.
Other systems in operation include a Quartermania system in Deadwood,
South Dakota, which includes approximately 60 machines. In Iceland,
one system developed by the Company operates under the name Gullnaman
with approximately 340 machines. A Megabucks system in Macau
consists of approximately 170 machines. The Company plans to begin
operating a MegaJackpotsT system in Lima, Peru during fiscal 1998.
To further develop and expand its proprietary gaming systems market,
the Company has entered into separate joint marketing alliances with
Anchor Games ("Anchor"), Mikohn Gaming Corporation and Shuffle Master
Gaming. The purpose of these strategic alliances is to combine the
game development efforts of other companies with the Company's wide-
area progressive system expertise. Wheel of Fortuner, which is
offered in conjunction with Anchor, has proven to be a successful new
system. The system started in December 1996 in Nevada and New Jersey
with approximately 240 games. As of September 1997, 3,100 Wheel of
Fortuner games were online operating in seven jurisdictions. Wheel
of Gold and Totem Pole are also new game developments of the Anchor
joint venture with approximately 150 games online operating in three
jurisdictions.
The Company also continues its own development of additional
innovative games in the MegaJackpotsT format. Super Megabucks, the
newest IGT MegaJackpotsT slot game, offers a jackpot that starts at
$10 million. The four reel, three coin game pays the first million
dollars to the winner immediately. The remainder is paid in 30 equal
annual installments.
The operation of linked progressive systems varies among
jurisdictions as a result of different gaming regulations. In
Louisiana, Mississippi, Missouri, Native American locations, Nevada
and South Dakota, the casinos retain the net win, less a percentage
of the pay table dedicated to fund the progressive jackpot which is
administered by the Company. These jackpots are paid in equal
installments over a twenty to thirty-one year period. In Atlantic
City, the casinos retain the net win, less a percentage of the pay
table dedicated to fund the progressive jackpot which is administered
by a trust managed by representatives of the participating casinos to
pay the jackpots and other system expenses. The trust records a
liability to the Company for an annual casino licensing fee as well
as an annual machine rental fee for each machine. In Colorado, the
casinos retain the net win less a percentage of the pay table
dedicated to fund the progressive jackpot administered by a separate
fund managed by the Company which pays the jackpots. Progressive
system lease fees are paid to the Company from this fund.
The Company also offers a "leased" link progressive system which
links gaming machines within a single casino or multiple casinos of
common ownership. Currently, three major hotel casinos operate
leased link progressive systems with approximately 260 gaming
machines linked on all such systems.
Lease and Other Gaming Operations
The Company also leases gaming equipment to its customers. As of
September 30, 1997, the Company leased approximately 3,800 gaming
machines primarily in the Colorado, Midwestern riverboat, and Nevada
markets. Additionally, the Company leased 340 gaming machines in
Peru. The Company has also provided approximately 2,100 machines
under participation and rental agreements primarily in the Nevada
casino market and in the Iceland and Norway markets.
Video gaming in Oregon commenced in March 1992 and IGT was awarded
the contract to supply the central computer system that links
approximately 8,500 terminals. The Company currently leases
approximately 2,200 machines to the Oregon State Lottery and will
continue to provide them with video gaming terminals under a separate
lease agreement which will expire in April 2002.
<PAGE>
Item 1. Business (continued)
In September 1992, Rhode Island began operating a video lottery
system linking VLT's at two pari-mutuel facilities. As of September
30, 1997, an estimated 1,600 terminals were operating on the system.
IGT, one of four manufacturers providing terminals, supplied
approximately 300 Winner's Choice terminals installed on this system
and receives revenue for the use of the terminals. In September
1997, the Rhode Island Lottery signed a new technology lease
agreement with the Company, which will expire in September 2000. The
Rhode Island Lottery has the authorization to place up to 5,000
machines under current legislation.
In December 1995, video gaming became operational in Delaware. Under
a technology provider license with the Delaware State Lottery, the
Company leases approximately 1,300 machines to the state. These
machines are located at three pari-mutuel facilities across the
State. The Company receives a percentage of revenue for use and
maintenance of these machines. Delaware legislation includes a "50%
rule" which prohibits a racetrack from having more than fifty percent
of its machines manufactured by the same vendor. The original
technology lease agreement between the Company and the Delaware
Lottery will expire in December 2001.
The Company presently has 600 machines under lease at Mountaineer
Race Track in Chester, West Virginia. These machines are connected
to the IGT SAMS central computer, which is installed at the West
Virginia lottery offices in Charleston, West Virginia.
In January 1993, the Company began operating gaming machines at the
Reno/Tahoe International Airport under a contract with the Washoe
County Airport Authority ("WCAA"). The Company and the WCAA share in
the net win of approximately 200 machines currently operating with a
minimum annual guaranteed amount.
In December 1997, the IGDreamport joint venture is scheduled to begin
the operation of 200 lottery machines and a central system in Brazil
through GTECH's wholly owned subsidiary Racimec.
Marketing and Sales
The most significant factor influencing the purchase of all types of
gaming machines is player appeal followed by a mix of elements
including service, price, reliability, technical capability and the
financial condition and reputation of the manufacturer. Player
appeal is key because it combines the machine design, hardware,
software and play features that ultimately improve the earning power
of gaming machines and the customer's return on investment. IGT
devotes substantial resources to continually upgrade its products and
conduct ongoing game development. The Company's customer service
organization is also a significant contributor to IGT's overall
competitive position.
The Company has made significant investments in research and
development of products tailored toward the specific demands of its
customers (casino operators) as well as the users of its products.
In this context, IGT has for a number of years developed annually
more than 25 different game themes which are tested to measure
consumer appeal. IGT uses Megatest, an on-line computerized testing
and monitoring system, to evaluate and forecast acceptance of new
products. Megatest uses the Company's wide-area progressive
technology to monitor from a central computer the performance of
games placed in a representative sample of casinos throughout the
state of Nevada. The new product test games are measured against a
control group to evaluate the performance of the test games in real-
time. The Megatest program allows IGT to test more games with
greater accuracy and in a shorter time frame and results in the
release of high-performing games. IGT's game library contains
numerous game variations.
Reprogramming machines for the newest games and changing the graphics
design can be accomplished quickly. In international markets, the
Company's strategy is to respond to developing markets with local
presence, customized games, new product introductions and local
production where feasible.
<PAGE>
Item 1. Business (continued)
In addition to offering an expansive product line, the Company
provides customized services in response to specific casino requests.
These services include high quality graphics design, silkscreen
printing of gaming machine glass, video graphics and customized game
development. The Company also offers customized design services that
utilize computer-aided design and three-dimensional studio software
programs. The Company's interior design department has the ability
to generate a casino floor layout and can create a proposed casino
slot mix for its customers. The final design incorporates casino
colors, themes, signage, custom graphics and includes either an
overhead floor plan layout, viewable from any angle, or a three-
dimensional moving walk-through of the casino.
The Company considers its customer service department an important
aspect of the overall marketing strategy. IGT typically provides a
90-day service and parts warranty for its gaming machines. The
Company currently has approximately 320 trained service personnel for
customer assistance and maintains service offices domestically in
Colorado, Delaware, Florida, Louisiana, Mississippi, Missouri,
Montana, Nevada and New Jersey, and internationally in Argentina,
Australia, Brazil, Canada, Japan, New Zealand, Peru, South Africa and
The Netherlands.
IGT also offers its customers educational programs and several
customer-related services. The Company provides customer education
in the form of installation training at IGT locations, on-site
training and videotape instruction. Other custom services include a
24-hour customer service hotline, a monthly technical services
bulletin, customer notifications, a Slot Line newsletter for slot
floor managers, and program summary reports designed to answer
specific software systems questions. The Technical Assistance Center
("TAC") is a fully staffed facility to provide 24-hour telephone
support to all types of system customers. The TAC has access to a
range of field support engineering resources to resolve technical
issues.
IGT also provides information to customers through an electronic
bulletin board system. Customers can access this system 24 hours a
day, seven days a week. The system lets users view and download a
variety of information related to IGT products and services. This
system gives customers information on demand and provides a direct
link for two-way communication between the customer and IGT.
Marketing services were expanded in September 1997, when the Company
launched its internet site at www.igtgame.com. The 250-page site
includes information about the Company, its products, MegaJackpotsT
systems, job opportunities, sales offices and strategic alliances.
IGT markets gaming products and proprietary systems through its
internal sales staff, agents and distributors. The Company employs
165 sales personnel in several United States office locations, as
well as Australia, Canada, Europe, Latin America, New Zealand and
South Africa.
IGT uses distributors for sales to specific markets including
Louisiana, New Jersey, Native American reservations, a Canadian
maritime province, the Caribbean, France and Japan. The Company's
agreements with distributors do not specify minimum purchases but
generally provide that the Company may terminate the distribution
agreement if certain performance standards are not met.
The Company's products and services are sold to gaming operators in
jurisdictions where gaming is legal. Its products and services are
also sold to government entities which conduct gaming operations.
During fiscal 1997, the Company's ten largest customers accounted for
28% of its gaming product sales. Sodak, the Company's principal
distributor of gaming products to Native American reservations, was
the largest purchaser of the Company's products, accounting for
approximately 8% of total product sales. The Company believes the
loss of this customer would not have a long-term material adverse
effect on product sales of the Company, as other means of
distribution to this market are available. There were no individual
customers accounting for greater than 10% of the Company's product
sales.
<PAGE>
Item 1. Business (continued)
The nature of the Company's business encompasses large initial orders
of gaming products upon the opening, expansion or renovation of a
casino, as well as for the start-up of government-sponsored video
gaming operations. Subsequent orders from established customers
result from remodeling or expansion of existing facilities, as well
as replacement of machines due to technological advancements, new
designs and upgrades. Sales of the Company's products can fluctuate
from quarter to quarter as new jurisdictions legalize gaming and new
casinos in established gaming markets are opened.
Competition
Product Sales
The Company competes with U.S. and foreign manufacturers in the
casino-style gaming machine market. The primary competitors are Bally
Gaming, Inc. ("Bally"), a subsidiary of Alliance Gaming Corporation,
and Sigma Game, Inc. ("Sigma"). In addition to the primary
competitors, the Company's competitors include six other
manufacturers: Anchor; Aristocrat; Casino Data Systems ("CDS");
Silicon Gaming, Inc.; Video Lottery Consultants, Inc., a subsidiary
of Video Lottery Technologies, Inc. ("VLT"); and WMS Industries, Inc.
("WMS"). All have developed casino products and are either
authorized to sell products or are in the licensing process in many
U.S. gaming jurisdictions. There are several competitors for the
international markets including Aristocrat, Atronic, Cirsa, Franco
and Novomatic.
The Company's SMART and IGS systems provide accounting and player
tracking analytical support to operators. The Company views this
product line as an increasingly important complementary offering. In
the accounting and player tracking systems product market, the
Company competes with CDS, Bally and several other system
manufacturers. IGT's strategic alliance with Acres Gaming, Inc.,
combined with its IGS offering, is intended to strengthen its
position in this marketplace.
The Company considers itself one of five primary competitors in the
video gaming terminal market. Competitors in this market include:
GTECH, Spielo, a supplier based in Canada, VLT and WMS. These
suppliers have an established presence in the lottery market,
substantial resources and specialize in the development and marketing
of gaming terminals to governments. The Company continues to view
the video lottery industry as an important market for its products
and initiated the IGDreamport joint venture to further pursue this
market.
Gaming Operations
As of September 30, 1997, the Company had in operation 67
MegaJackpotsT systems throughout 11 gaming jurisdictions including
Native American casinos, Iceland and Macau. MegaJackpotsT systems
link machines within a given jurisdiction to offer large slot
jackpots (often exceeding $1 million), with the primary jackpot paid
in annual installments. The most significant factor influencing the
play on progressive systems is enhanced player appeal resulting from
the large slot jackpot payouts. The systems also appeal to casino
operators due to the game's earnings premium and because they
emphasize strong security and control features.
The competition in the proprietary systems business has recently
increased. Most notable competitors are Anchor, Bally and CDS. CDS'
"Cool Millions" progressive system competes with IGT's Megabucks and
Dollars Deluxe progressive systems. In addition, CDS has developed a
quarter slot progressive system to compete with the Company's
Quartermania and Quarters Deluxe products. Anchor's stand-alone
version of games, such as Totem Pole and Wheel of Gold, also compete
in this market.
IGT provides substantial marketing and advertising support for its
MegaJackpotsT systems products and competes on the basis of the
Company's progressive systems brand names, product market appeal,
large jackpot awards, player loyalty, and technical and marketing
experience.
<PAGE>
Item 1. Business (continued)
Manufacturing and Suppliers
The Company's manufacturing operations primarily involve the
assembly of electronic components, cables, harnesses, video monitors
and prefabricated parts purchased from outside sources. The Company
also operates a cabinet manufacturing and silkscreen facility. The
Company has a broad base of suppliers for its required material and
utilizes multi-sourcing practices to assure component availability.
The Company uses its quality control group to assure supplier
quality as well as internal quality of the products produced. The
Company has positive business relations with its suppliers and
continually reviews the business needs of the Company with them.
The Company generally carries a significant amount of inventory due
to the broad range of products it manufactures and to facilitate its
capacity to fill customer orders on a timely basis. At November 30,
1997 and 1996, the Company had an estimated $51.6 million and $61.3
million in backlog orders. This represents a normal backlog and the
Company reasonably expects to fill the November 30, 1997 backlog
within fiscal 1998.
Research and development activities sponsored by the Company totaled
$31.1 million, $25.7 million and $28.5 million for the years ended
September 30, 1997, 1996 and 1995, respectively. Research and
development activities for specific customers are charged to cost of
product sales and totaled $448,000, $835,000 and $283,000 for the
years ended September 30, 1997, 1996 and 1995, respectively.
In December 1997, the Company will commence a project to identify,
evaluate and implement changes to computer systems and applications
necessary to achieve a year 2000 date conversion with no effect on
customers or disruption to business operations. The Company will
also be communicating with suppliers, financial institutions and
others with which it conducts business to coordinate year 2000
conversions. The total cost of compliance and its effect on the
Company's future results of operations will be determined as a part
of this project. Based on initial review, the total cost is not
expected to have a material effect on the Company's results of
operation or financial statements. However, there can be no
assurance that the systems of other companies on which the Company
may rely will be timely converted or that such failure to convert by
another company would not have an adverse effect on the Company's
systems.
Patents, Copyrights and Trade Secrets
The Company's computer programs and technical know-how are its main
trade secrets, and management believes that they can best be
protected by using technical devices to protect the computer
programs and by enforcing contracts with certain employees and
others with respect to the use of proprietary information, trade
secrets and covenants not to compete. The Company has obtained
patents and copyrights with respect to various aspects of its games
and other products, including progressive systems and player
tracking systems, and has patent applications on file for
protection of certain developments it has created. No assurance can
be given that the pending applications will be granted. These
patents range in subject matter from new game designs, including
interactive video games and new slot game techniques, as well as
gaming device components such as, coin-handling apparatus, fiber-
optic light pens, coin-escalator mechanisms, optical door interlock,
and a variety of other aspects of video and electronic slot machines
and systems. There can be no assurance that the patents will not be
infringed or that others will not develop technology that does not
violate the patents.
The Company's intellectual property portfolio includes United States
Patent No. 4,448,419, referred to as the Telnaes patent or the
"virtual reel" patent. The Telnaes patent expires in 2002. The
Company believes that rights under the Telnaes patent are important
to the manufacture of spinning reel slot machines. In addition to
IGT's ownership interest in the patent, the following companies
currently hold licenses of various forms under this patent: Bally,
CDS, Sigma, and Universal Distributing.
<PAGE>
Item 1. Business (continued)
Bally could become a competitor in the progressive systems business
due to the expiration of an agreement between the Company and Bally
in December 1997. In 1992, the Company and Bally settled a lawsuit
relating to a United States patent owned by the Company. Under this
settlement agreement, Bally agreed to limit the odds available on its
spinning reel gaming machines for a period extending through December
1997. The odds limitation has effectively precluded Bally from
producing wide-area progressive systems machines with spinning reels
since the settlement agreement in 1992. When the odds limitation on
Bally spinning reel products expires, Bally will no longer be
precluded from producing and marketing wide-area progressive systems
machines.
Employees
As of September 30, 1997, the Company, including all subsidiaries,
employed approximately 2,600 persons, including 520 in
administrative positions, 210 in sales and 380 in engineering. Of
the total employees, IGT (the Company's North American operations)
accounted for 2,186; IGT-Australia, 287; IGT-Europe, 27; IGT-Peru,
18; IGT-Japan, 17; IGT-Africa, 9; IGT-Argentina, 6; and IGT-Brazil,
6. The total number of employees decreased in fiscal 1997 by
approximately 200 as compared with the number of employees at
September 30, 1996, due to consolidation of the Company's operations
at the new South Meadows facility and higher production levels in
the fourth quarter of the prior fiscal year than in the fourth
quarter of fiscal 1997.
Government Regulation
Nevada Regulation
The manufacture, sale and distribution of gaming devices in Nevada
are subject to extensive state laws, regulations of the Nevada
Gaming Commission and State Gaming Control Board (the "Nevada
Commission"), and various county and municipal ordinances. These
laws, regulations and ordinances primarily concern the
responsibility, financial stability and character of gaming
equipment manufacturers, distributors and operators, as well as
persons financially interested or involved in gaming operations.
The manufacture, distribution and operation of gaming devices
require separate licenses. The laws, regulations and supervisory
procedures of the Nevada Commission seek to (i) prevent unsavory or
unsuitable persons from having a direct or indirect involvement with
gaming at any time or in any capacity, (ii) establish and maintain
responsible accounting practices and procedures, (iii) maintain
effective control over the financial practices of licensees,
including establishing minimum procedures for internal fiscal
affairs and the safeguarding of assets and revenues, providing
reliable record keeping and requiring the filing of periodic reports
with the Nevada Commission, (iv) prevent cheating and fraudulent
practices, and (v) provide a source of state and local revenues
through taxation and licensing fees. Changes in such laws,
regulations and procedures could have an adverse effect on the
Company's operations.
A Nevada gaming licensee is subject to numerous restrictions.
Licenses must be renewed periodically and licensing authorities have
broad discretion with regard to such renewals. Licenses are not
transferable. Each type of machine sold by the Company in Nevada
must first be approved by the Nevada Commission, which may require
subsequent machine modification. Substantially all material loans,
leases, sales of securities and similar financing transactions must
be reported to or approved by the Nevada Commission. Changes in
legislation or in judicial or regulatory interpretations could occur
which could adversely affect the Company.
A publicly traded corporation must be registered and found suitable
to hold an interest in a corporate subsidiary which holds a gaming
license. International Game Technology has been registered by the
Nevada Commission as a publicly traded holding company and was
permitted to acquire IGT as its wholly-owned subsidiary. As a
registered holding company, it is required periodically to submit
detailed financial and operating reports to such Commission and
furnish any other information which the Commission may require. No
person may become a stockholder of, or receive any percentage of
profits from, a licensed subsidiary without first obtaining licenses
and approvals from the Nevada Commission. Officers, directors and
key employees of a licensed subsidiary and of the Company who are
actively engaged in the administration or supervision of gaming must
be found suitable.
<PAGE>
Item 1. Business (continued)
No proceeds from any public sale of securities of a registered
holding corporation may be used for gaming operations in Nevada or
to acquire a gaming property without the prior approval of the
Nevada Commission. The Company believes it has all required licenses
to carry on its business in Nevada.
Officers, directors, and certain key employees of the Company who
are actively and directly involved in gaming activities of the
Company's licensed gaming subsidiary may be required to be licensed
or found suitable. Officers, directors, and certain key employees
of the Company's licensed gaming subsidiary must file applications
with the Nevada Commission and may be required to be licensed or
found suitable. Employees associated with gaming must obtain work
permits which are subject to immediate suspension under certain
circumstances. In addition, anyone having a material relationship
or involvement with the Company may be required to be found suitable
or licensed, in which case those persons would be required to pay
the costs and fees of the State Gaming Control Board (the "Control
Board") in connection with the investigation. An application for
licensure or finding of suitability may be denied for any cause
deemed reasonable by the Nevada Commission. A finding of
suitability is comparable to licensing and both require submission
of detailed personal and financial information followed by a
thorough investigation. Changes in licensed positions must be
reported to the Nevada Commission. In addition to its authority to
deny an application for a license or finding of suitability, the
Nevada Commission has jurisdiction to disapprove a change in
position by such officer, director, or key employee.
The Nevada Commission has the power to require the Company and its
licensed gaming subsidiary to suspend or dismiss officers,
directors or other key employees and to sever relationships with
other persons who refuse to file appropriate applications or whom
the authorities find unsuitable to act in such capacities.
Determinations of suitability or of questions pertaining to
licensing are not subject to judicial review in Nevada.
The Company and its licensed gaming subsidiary are required to
submit detailed financial and operating reports to the Nevada
Commission. If it were determined that gaming laws were violated by
a licensee, the gaming licenses it holds could be limited,
conditioned, suspended or revoked subject to compliance with certain
statutory and regulatory procedures. In addition to the licensee,
the Company and the persons involved could be subject to substantial
fines for each separate violation of the gaming laws at the
discretion of the Nevada Commission. In addition, a supervisor
could be appointed by the Nevada Commission to operate the Company's
gaming property and, under certain circumstances, earnings generated
during the supervisor's appointment could be forfeited to the State
of Nevada. The limitation, conditioning or suspension of any gaming
license or the appointment of a supervisor could (and revocation of
the gaming license would) materially and adversely affect the
Company's operations.
The Nevada Commission may also require any beneficial holder of the
Company's voting securities, regardless of the number of shares
owned, to file an application, be investigated, and be found
suitable, in which case the applicant would be required to pay the
costs and fees of the Control Board investigation. If the
beneficial holder of voting securities who must be found suitable is
a corporation, partnership, or trust, it must submit detailed
business and financial information including a list of beneficial
owners. Any person who acquires 5% or more of the Company's voting
securities must report the acquisition to the Nevada Commission; any
person who becomes a beneficial owner of 10% or more of the
Company's voting securities must apply for a finding of suitability
within 30 days after the Chairman of the Nevada Board mails the
written notice requiring such finding.
<PAGE>
Item 1. Business (continued)
Under certain circumstances, an Institutional Investor, as such term
is defined in the Nevada Regulations, which acquires more than 10%,
but not more than 15%, of the Company's voting securities may apply
to the Nevada Commission for a waiver of such finding of suitability
requirements, provided the institutional investor holds the voting
securities for investment purposes only. An institutional investor
will not be deemed to hold voting securities for investment purposes
unless the voting securities were acquired and are held in the
ordinary course of business as an institutional investor and not for
the purpose of causing, directly or indirectly, the election of a
majority of the board of directors of the Company, any change in the
Company's corporate charter, bylaws, management, policies or
operations of the Company, or any of its gaming affiliates, or any
other action which the Nevada Commission finds to be inconsistent
with holding the Company's voting securities for investment purposes
only. Activities which are not deemed to be inconsistent with
holding voting securities for investment purposes only include: (i)
voting on all matters voted on by stockholders; (ii) making
financial and other inquiries of management of the type normally
made by securities analysts for informational purposes and not to
cause a change in its management, policies or operations; and (iii)
such other activities as the Nevada Commission may determine to be
consistent with such investment intent.
The Nevada Commission has the power to investigate any debt or
equity security holder of the Company. The Clark County Liquor and
Gaming Licensing Board, which has jurisdiction over gaming in the
Las Vegas area, may similarly require a finding of suitability for a
security holder. The applicant stockholder is required to pay all
costs of such investigation. The bylaws of the Company provide for
the Company to pay such costs as to its officers, directors or
employees.
Any person who fails or refuses to apply for a finding of
suitability or a license within 30 days after being ordered to do so
by the Nevada Commission or Chairman of the Nevada Board may be
found unsuitable. The same restrictions apply to a record owner if
the record owner, after request, fails to identify the beneficial
owner. Any stockholder found unsuitable and who holds, directly or
indirectly, any beneficial ownership of the Common Stock beyond such
period of time as may be prescribed by the Nevada Commission may be
guilty of a criminal offense. The Company is subject to
disciplinary action, and possible loss of its approvals, if, after
it receives notice that a person is unsuitable to be a stockholder
or to have any other relationship with the Company, the Company (i)
pays that person any dividend or interest upon voting securities of
the Company, (ii) allows that person to exercise, directly or
indirectly, any voting right conferred through securities held by
that person, (iii) gives remuneration in any form to that person,
for services rendered or otherwise, or (iv) fails to pursue all
lawful efforts to require such unsuitable person to relinquish his
voting securities for cash at fair market value. Additionally the
Clark County authorities have taken the position that they have the
authority to approve all persons owning or controlling the stock of
any corporation controlling a gaming license.
The Nevada Commission may, in its discretion, require the holder of
any debt security of the Company to file applications, be
investigated and be found suitable to own the debt security of the
Company. If the Nevada Commission determines that a person is
unsuitable to own such security, then pursuant to the Nevada Act,
the Company can be sanctioned, including the loss of its approvals,
if without the prior approval of the Nevada Commission, it: (i)
pays to the unsuitable person any dividend, interest, or any
distribution whatsoever; (ii) recognizes any voting right by such
unsuitable person in connection with such securities; (iii) pays the
unsuitable person remuneration in any form; or (iv) makes any
payment to the unsuitable person by way of principal, redemption,
conversion, exchange, liquidation, or similar transaction.
<PAGE>
Item 1. Business (continued)
The Company is required to maintain a current stock ledger in Nevada
which may be examined by the Nevada Commission at any time. If any
securities are held in trust by an agent or by a nominee, the record
holder may be required to disclose the identity of the beneficial
owner to the Nevada Commission. A failure to make such disclosure
may be grounds for finding the record holder unsuitable. The
Company is also required to render maximum assistance in determining
the identity of the beneficial owner. The Nevada Commission has the
power at any time to require the Company's stock certificates to
bear a legend indicating that the securities are subject to the
Nevada Gaming Control Act (the "Nevada Act") and the regulations of
the Nevada Commission. To date, the Nevada Commission has not
imposed such a requirement.
The Company may not make a public offering of its securities without
the prior approval of the Nevada Commission if the securities or
proceeds therefrom are intended to be used to construct, acquire or
finance gaming facilities in Nevada, or retire or extend obligations
incurred for such purposes. Such approval, if given, does not
constitute a finding, recommendation, or approval by the Nevada
Commission or the Nevada Board to the accuracy or adequacy of the
prospectus or investment merits of the securities. Any
representation to the contrary is unlawful. Changes in control of
the Company through merger, consolidation, acquisition of assets or
stock, management or consulting agreements or any form of takeover
cannot occur without the prior investigation of the Control Board
and approval of the Nevada Commission. Entities seeking to acquire
control of the Company must satisfy the Nevada Board and Nevada
Commission in a variety of stringent standards prior to assuming
control of the Company. The Nevada Commission may also require
controlling stockholders, officers, directors and other persons
having a material relationship or involvement with the entity
proposing to acquire control, to be investigated and licensed as
part of the approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and other
corporate defense tactics that affect corporate gaming licensees in
Nevada, and corporations whose stock is publicly-traded that are
affiliated with those operations, may be injurious to stable and
productive corporate gaming. The Nevada Commission has established
a regulatory scheme to ameliorate the potentially adverse effects of
these business practices upon Nevada's gaming industry and to
further Nevada's policy to (i) assure the financial stability of
corporate gaming operators and their affiliates; (ii) preserve the
beneficial aspects of conducting business in the corporate form; and
(iii) promote a neutral environment for the orderly governance of
corporate affairs. Approvals are, in certain circumstances,
required from the Nevada Commission before the Company can make
exceptional repurchases of voting securities above the current
market price thereof and before a corporate acquisition opposed by
management can be consummated. Nevada's gaming laws and regulations
also require prior approval by the Nevada Commission if the Company
were to adopt a plan of recapitalization proposed by the Company's
Board of Directors in opposition to a tender offer made directly to
its stockholders for the purpose of acquiring control of the
Company.
Any person who is licensed, required to be licensed, registered,
required to be registered, or is under common control with such
persons (collectively, "Licensees"), and who proposes to become
involved in a gaming venture outside of Nevada is required to
deposit with the Control Board, and thereafter maintain, a revolving
fund in the amount of $10,000 to pay the expenses of investigation
by the Control Board of the licensee's participation in foreign
gaming.
The revolving fund is subject to increase or decrease at the
discretion of the Nevada Commission. Thereafter, Licensees are
required to comply with certain reporting requirements imposed by
the Nevada Act. A licensee is also subject to disciplinary action
by the Nevada Commission if it knowingly violates any laws of the
foreign jurisdiction pertaining to the foreign gaming operation,
fails to conduct the foreign gaming operation in accordance with the
standards of honesty and integrity required of Nevada gaming
operations, engages in activities that are harmful to the State of
Nevada or its ability to collect gaming taxes and fees, or employs a
person in the foreign operation who has been denied a license or
finding of suitability in Nevada on the grounds of personal
unsuitability.
<PAGE>
Item 1. Business (continued)
Other Jurisdictions
Many other jurisdictions in which the Company does business require
various licenses, permits, and approvals in connection with the
manufacture and/or the distribution of gaming devices, and operation
of progressive systems, typically involving restrictions similar in
most respects to those of Nevada.
Thus far the Company has never been denied any such necessary
governmental licenses, permits or approvals. No assurances, however,
can be given that such required licenses, permits or approvals will
be given or renewed in the future.
Item 2. Properties
In May 1994, the Company purchased a 78 acre site in Reno, Nevada
for approximately $6.0 million for the construction of an
approximately 1.0 million square foot corporate headquarters,
manufacturing and warehousing facility and cabinet manufacturing
facility (the "South Meadows" facility). The manufacturing and
warehousing facility was completed in January 1996, and the
corporate offices were completed in March 1997. Substantially all
employees in Reno, Nevada now work at the facilities. The total
cost of these facilities, including the site, was $89.3 million.
The Company has started construction of an 85,000 square foot
cabinet manufacturing facility adjacent to the South Meadows
facility to be completed in the spring of 1998 at an estimated cost
of $5.5 million. To date, $1.5 million has been incurred for
construction of the cabinet shop facility.
In October 1996, the Company sold two adjoining office buildings in
Reno, Nevada, totaling 92,000 square feet. The Company's research
and development and corporate office personnel occupied
approximately 72,000 square feet of the buildings. The remaining
square footage was leased to third parties. The Company rented from
the buyer until the South Meadows office facility was completed in
March 1997.
The Company currently leases two buildings with a total square
footage of approximately 179,000. The lease on these facilities
expire in 2001. The Company has vacated the buildings and subleased
91,500 square feet to third parties. A sublessor will be sought for
the remaining space.
Additionally, IGT leases approximately 130,000 square feet of office
and warehouse space in Las Vegas, Nevada along with approximately
163,000 square feet in other Nevada locations and various
jurisdictions where it conducts business including Canada, Colorado,
Delaware, Florida, Louisiana, Mississippi, Missouri, Montana and New
Jersey.
IGT-Europe leases approximately 35,000 square feet of office and
warehouse space in Hoofddorp, The Netherlands.
IGT-Australia owns a 304,000 square foot office, production and
warehouse facility in Sydney, New South Wales, Australia.
Currently, IGT-Australia utilizes approximately 110,000 square feet
of this space and subleases the remainder of the facility. In
Wellington, New Zealand, IGT-Australia owns a 12,000 square foot
office and warehouse facility. Additionally, IGT-Australia leases
approximately 13,500 square feet of office and warehouse space in
various locations throughout Australia.
Internationally, the Company leases approximately 33,000 square feet
of office and warehouse space in Argentina, Brazil, Japan, Peru and
South Africa.
Item 3. Legal Proceedings
The Company has been named in and has brought lawsuits in the normal
course of business. Management does not expect the outcome of these
suits to have a material adverse effect on the Company's financial
position or results of future operations. For a description of
these matters, see Note 10 of the Notes to Consolidated Financial
Statements.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Part II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters
<TABLE>
The Company's common stock is listed on the New York Stock Exchange
("NYSE") under the symbol "IGT". The following table sets forth for
the periods presented the high and low sales prices of the common
stock as traded on the NYSE:
<CAPTION>
Fiscal 1997 High Low
<S> <C> <C>
First Quarter $23 1/2 $17 5/8
Second Quarter 19 3/4 16 1/4
Third Quarter 19 1/8 15 3/8
Fourth Quarter 23 1/4 16 1/2
Fiscal 1996 High Low
First Quarter $13 3/4 $10 3/4
Second Quarter 15 1/8 10 3/4
Third Quarter 18 1/4 14 1/8
Fourth Quarter 21 3/8 15 1/2
</TABLE>
As of November 26, 1997, there were approximately 6,438 record
holders of the Company's common stock which had a closing price of
$25.00 on that date.
The Company declared four quarterly dividends of $.03 per share in
both fiscal 1996 and fiscal 1997. It is anticipated that comparable
cash dividends will continue to be paid in the future.
The Company's transfer agent and registrar is Continental Stock
Transfer & Trust Company, 2 Broadway, New York, New York 10004, (212)
509-4000.
<PAGE>
Item 6. Selected Financial Data
<TABLE>
The following information has been derived from the Company's
consolidated financial statements:
<CAPTION>
Years Ended September 30,
1997 1996 1995 1994 1993
(Amounts in thousands, except
per share data)
<S> <C> <C> <C> <C> <C>
Selected Income Statement
Data
Total revenues $ 743,970 $ 733,452 $620,786 $674,461 $478,030
Income from operations $ 191,437 $ 169,833 $139,341 $197,906 $150,238
Income from continuing
operations $ 137,247 $ 118,017 $ 92,648 $140,447 $105,578
Income from discontinued
operations1 $ - $ - $ - $ - $ 13,447
Net income $ 137,247 $ 118,017 $ 92,648 $140,447 $119,025
Income per primary share
from continuing
operations $ 1.13 $ 0.93 $ 0.71 $ 1.07 $ 0.85
Income per fully diluted
share from continuing
operations $ 1.12 $ 0.92 $ 0.71 $ 1.05 $ 0.80
Net income per primary
share $ 1.13 $ 0.93 $ 0.71 $ 1.07 $ 0.96
Net income per fully
diluted share $ 1.12 $ 0.92 $ 0.71 $ 1.05 $ 0.90
Cash dividends declared
per common share $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.09
Average primary common and
common equivalent shares
outstanding 121,829 127,412 131,094 131,380 123,618
Average common and common
equivalent shares
outstanding assuming
full dilution 122,390 128,160 131,094 135,858 136,611
Selected Balance Sheet Data
Working capital $ 406,958 $ 488,150 $508,917 $480,698 $379,680
Total assets $1,215,052 $1,154,187 $971,698 $868,008 $646,593
Long-term notes payable
and capital lease
obligations $ 140,713 $ 107,155 $107,543 $111,468 $120,613
Stockholders' equity $ 519,847 $ 623,200 $554,090 $520,868 $378,549
</TABLE>
1 Discontinued operations consist of casino operations which the Company sold
during fiscal 1993.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
The Company operates principally in two lines of business: the
manufacture and sale of gaming products (product sales); and
proprietary systems and gaming equipment leasing (gaming
operations).
Fiscal 1997 Compared to Fiscal 1996
Net income for fiscal 1997 was $137.2 million or $1.12 per fully
diluted share compared to $118.0 million or $.92 per fully diluted
share in fiscal 1996. Growth in revenue, declining operating
expenses, and gains on the sale of investment securities contributed
to this improvement in earnings over the prior year.
Revenues and Cost of Sales
Revenues for the year ended September 30, 1997 totaled $744.0 million
representing an increase of $10.5 million over fiscal 1996 revenues
of $733.5 million. This improvement resulted from a 12% increase in
gaming operations revenues partially offset by a 4% decrease in
product sales revenues.
Product sales revenues were $461.2 million on shipments of 79,300
gaming machines in fiscal 1997 compared to $481.7 million on
shipments of 85,400 gaming machines in fiscal 1996. Product sales in
the traditional North American market were impacted by slower growth
rates in the introduction of new casinos, in the expansion of
existing properties and in the replacement of existing machines.
Sales of 54,000 units in 1997 in the North American market decreased
from 62,600 units in the prior year. Shipments to Nevada casinos
remained consistent year over year but sales to the Midwestern
riverboat, Native American and New Jersey markets declined slightly.
The Company maintained or increased its market share of the domestic
orders during the year and provided more than 4,200 machines to the
new riverboat operations in Indiana. Sales of 5,900 video lottery
and gaming machines to the Canada market positively impacted revenues
for the year.
The Company was profitable in all international regions in fiscal 1997.
Product sales in international markets increased for a second year
to a total of $139.3 million compared to $117.6 million in fiscal 1996.
Total international shipments reached 25,600 units during the current
year compared to 22,800 in fiscal 1996. Machine sales of 7,700 units
in Australia in 1997, an increase of 1,700 units, led this growth. A
full year of sales in the Japanese pachisuro market also contributed
to the improvement. International sales during the year included 700 gaming
machines to the first South African casinos in the Mpumalanga province.
The gross margin on product sales declined slightly to 44% in 1997
versus 45% in 1996. This fluctuation was primarily a function of a
higher international sales mix and to a lesser extent, lower domestic
volumes.
The Company anticipates that the slower growth of the U.S. market
experienced in fiscal 1997 will continue in the near future. This
decreased rate of growth may be offset, in part, by future
improvements in the Company's international market share and the
spread of legalized gaming in international markets. The Company
continues to pursue international opportunities in a variety of
jurisdictions including Japan, South Africa and South America. The
pace of growth within domestic and international markets is, however,
outside the control of the Company and has been and continues to be
influenced by public opinion and the legal and electoral processes.
As a result, the Company cannot predict the rate at which domestic
and international markets will develop and any slowdown or delay in
the growth of new markets will adversely affect the Company's future
results. Additionally, the Company anticipates increased competition
in the sale of gaming products with the recent and anticipated future
governmental licensing of competitors.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, (continued)
Gaming operations revenue totaled $282.8 million and $251.8 million
in the years ended September 30, 1997 and 1996, respectively. This
12% increase resulted primarily from growth in the proprietary
systems including those operated under joint venture agreements. The
Company had approximately 11,700 machines on 67 systems at September
30, 1997 versus 9,400 games on 44 systems at September 30, 1996. The
Wheel of Fortune proprietary system, operated in conjunction with
Anchor, began operation in December 1996 and accounted for 3,100
machines at the end of fiscal 1997. Gaming operations revenues were
also positively impacted by increased participation revenue from the
Delaware racetracks. The Company will continue to pursue additional
markets, domestically and internationally, for its linked progressive
games. However, growth in proprietary systems is dependent on
government approval and subject to increasing competition in all
markets.
The gross margin on gaming operations revenues was 49% for fiscal
1997 versus 45% for fiscal 1996. This improvement was primarily due
to revenues from joint venture activities, which, for accounting
purposes, are reported net of expenses. Higher costs of interest-
sensitive assets which the Company purchases to fund jackpot payments
partially offset the overall increase.
Expenses
Selling, general and administrative expenses decreased $10.1 million
or 9% to $98.4 million compared to the prior year. This decline was
primarily due to one-time charges of $8.2 million in fiscal 1996
attributable to the vacating of leased buildings in connection with
the move to the Company's new facilities and management changes. The
remainder of the decrease related to cost reduction efforts both
domestically and internationally.
Depreciation and amortization totaled $11.8 million and $12.6 million
for the years ended September 30, 1997 and 1996, respectively. This
decrease resulted from declines in depreciation on previously leased
facilities partially offset by increases in depreciation on the
administrative portion of the Company's new facility.
Research and development expenses were $31.1 million in fiscal 1997,
an increase of $5.4 million over the prior year. This increase
reflects the Company's focus on introducing several new products for
sale and for use on proprietary systems. Staffing levels have
increased approximately 15% and a lower percentage of custom
engineering projects, which are charged to the customer, were
required in fiscal 1997 versus fiscal 1996.
The provision for bad debt was $9.5 million in fiscal 1997 compared
to $11.6 million in fiscal 1996. Year over year, reserves on product
sales were recorded at consistent levels. Reserves of $3.4 million
were recorded in fiscal 1996 related to receivables in the developing
Asian and Papua New Guinea markets. Additional reserves of $1.3
million were recorded in 1997 relating to the higher mix of
international sales.
Other Income and Expense
Interest income totaled $41.7 million for fiscal 1997, a $2.6 million
or 7% increase over the prior year. Higher balances of interest
income producing assets associated with the Company's progressive
systems accounted for an increase of $5.8 million. Higher average
interest rates charged on receivable balances also contributed to the
increase. Sales of investment securities to fund purchases of
treasury stock resulted in a $4.2 million decrease in interest and
dividend income.
Interest expense for fiscal 1997 was $30.4 million compared to $23.5
million in fiscal 1996. This fluctuation was primarily due to
increased interest expense of $5.3 million associated with the growth
in jackpot liabilities. Interest expense attributable to the Senior
Notes (see Note 6 of the Notes to Consolidated Financial Statements)
also increased over the prior year due to the cessation of the
capitalization of interest related to the construction of the
Company's new facilities.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, (continued)
In fiscal 1997, the Company realized gains on the sale of assets of
$12.9 million relating to the sale of investment securities to fund
purchases of treasury stock. Comparatively, the Company had a net
loss of $5.1 million in fiscal 1996 due to writedowns of the
Company's investments in joint ventures within the developing markets
of Asia and South America and the Company's investment in Radica
Games Limited ("Radica").
Other income and expense netted a loss of $3.0 million and a gain of
$4.0 million for the years ended September 30, 1997 and 1996,
respectively. Both years were impacted by one-time legal
settlements.
Business Segments Operating Profit (See Note 15 of the Notes to
Consolidated Financial Statements)
Manufacturing and gaming operations operating profit reflects an
allocation of selling, general, administrative and engineering
expenses to each of these business segments.
Manufacturing operating profit for fiscal 1997 decreased $5.6 million
or 5% compared to the prior year. This decline resulted from a 4%
decrease in product sales and slightly lower gross profit margins.
Gaming operations operating profit for fiscal 1997 increased 28% or
$24.9 million. This improvement resulted primarily from revenues
from joint venture activities which for accounting purposes are
recorded net of expenses. Higher costs of interest-sensitive assets
purchased to fund jackpot payments partially offset the overall
increase.
Fiscal 1996 Compared to Fiscal 1995
Net income for fiscal 1996 totaled $118.0 million or $.92 per fully
diluted share compared to $92.6 million or $.71 per fully diluted
share in fiscal 1995. Total operating income growth of 22%
contributed significantly to the increase in net income over the
prior year.
Revenues and Cost of Sales
Total revenues for the year ended September 30, 1996 rose 18% due
to a $65.2 million or 16% increase in product sales and a $47.4
million or 23% increase in gaming operations revenues. Product
sales shipments grew to 85,400 units in fiscal 1996 compared to
73,100 units in fiscal 1995. Shipments to gaming operators in North
America were consistent, with 62,600 units sold in both fiscal 1996
and 1995. Shipments during the year decreased slightly in the
traditional Nevada casino market due to fewer casino expansions in
Northern Nevada compared to the prior year. This decrease was offset
by increased sales to Midwestern riverboat and Native American
markets where shipments totaled 15,000 and 13,000, respectively.
Total revenue related to Native American markets increased $18.7
million or 5% due to slightly higher average prices.
Product sales in international markets grew to $117.6 million due to
machine shipments of 22,800, which increased 105% over the prior
year. The largest international sales for fiscal 1996 were in
Japan, where the Company sold more than 7,000 pachisuro machines.
Sales in Argentina, Greece, New South Wales and Turkey also
contributed to the revenue growth.
The gross margin on product sales improved to 45% in fiscal 1996
compared to 44% in fiscal 1995. This increase is primarily due to
operating efficiencies including cost reductions and process
improvements achieved in domestic production. This increase was
partially offset by lower margins realized in the Japanese market
and inventory reserves in Australia.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, (continued)
Gaming operations revenue totaled $251.8 million and $204.4 million
for the years ended September 30, 1996 and 1995, respectively.
Growth in proprietary systems was the primary contributor to the
year over year increase. As of September 30, 1996, the Company
operated approximately 9,400 machines on 44 systems compared to
approximately 8,700 machines on 36 systems as of September 30, 1995.
Lease revenues also increased due to participation revenue from
Delaware racetracks.
Expenses
Selling, general and administrative expenses were $108.5 million for
fiscal 1996, an increase of $19.9 million over the prior year.
Nearly half of this increase, $8.2 million, is attributable to one-
time charges for the abandonment of leased buildings in connection
with the move to the Company's new facilities and management changes
occurring during 1996. The remaining increase is the result of
increased sales, marketing and administrative costs both
domestically and internationally.
Depreciation and amortization totaled $12.6 million and $14.4
million in fiscal 1996 and fiscal 1995, respectively. The decline is
a result of the acceleration of depreciation in fiscal 1995 on
leasehold improvements in response to the construction of the
Company's new facility. All such improvements had been fully
depreciated as of the beginning of fiscal 1996.
Research and development expenses were $2.8 million or 10% lower in
fiscal 1996 than in fiscal 1995. Although staffing levels have
remained consistent year over year, a larger percentage of custom
engineering was directly charged to the customer during fiscal 1996.
The provision for bad debts was $11.6 million for fiscal 1996 versus
$5.9 million for fiscal 1995. Higher sales volume during fiscal
1996 contributed to this increase. The Company also reserved an
additional $3.4 million related to receivables in the developing
Asian and Papua New Guinea markets.
Other Income and Expense
Interest income totaled $39.2 million for fiscal 1996, a $1.6
million or 4% increase over the prior year. This increase resulted
primarily from higher balances of interest income producing assets
associated with the Company's progressive systems. Partially
offsetting this increase, interest income earned on the Company's
notes and contracts receivable decreased due to lower interest rates
and lower average balances.
Interest expense for fiscal 1996 increased $3.2 million or 16% over
fiscal 1995. This fluctuation was due to increased interest expense
associated with the growth in jackpot liabilities. Interest expense
related to the private placement of Senior Notes (see Note 6 of the
Notes to Consolidated Financial Statements) decreased year over year
due to the capitalization of interest in connection with the
construction of the South Meadows manufacturing and administrative
facilities.
The net loss on securities in fiscal 1995 of $12.0 million was
primarily due to the writedown of the Company's investment in 2.1
million common shares of Radica to market value, resulting in a $14.6
million charge to pre-tax income. During the current year, the
shares were sold back to Radica, resulting in an additional $1.5
million loss. Loss on assets for fiscal 1996 resulted from the
writedown of the Company's investments in joint ventures within the
developing markets of Asia and South America. Other income and
expense for fiscal 1996 was impacted by one-time legal settlements in
Australia and with CDS.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, (continued)
Business Segments Operating Profit (See Note 15 of the Notes to
Consolidated Financial Statements)
Manufacturing and gaming operations operating profit reflects an
allocation of selling, general, administrative and engineering
expenses to each of these business segments.
Manufacturing operating profit for fiscal 1996 increased $16.3
million or 16% compared to the prior year. This positive
fluctuation was primarily due to a 16% increase in product sales and
slightly higher gross profit margins.
Gaming operations operating profit for fiscal 1996 increased 21% or
$15.5 million. This improvement resulted from a 23% growth in
revenues partially offset by a lower gross margin on gaming
operations. The lower margin was due to higher costs of interest
sensitive assets purchased to fund jackpot payments.
Foreign Operations
Approximately 30% and 24% of the Company's total product sales in
fiscal 1997 and 1996, respectively, were derived outside of the
United States. International operations are subject to certain
risks, including but not limited to, unexpected changes in
regulatory requirements, fluctuations in currency exchange rates,
tariffs and other barriers, and political and economic instability.
There can be no assurance that these factors will not have an
adverse impact on the Company's future sales or operating results.
To date, the Company has not experienced significant translation or
transaction losses related to foreign exchange fluctuations due to
the limited size of its foreign operations. As the Company
continues to expand its international operations, exposures to gains
and losses on foreign currency transactions may increase. The
Company has not yet, but may in the future, engage in currency
hedging transactions intended to reduce the effect of fluctuations
in foreign currency exchange rates.
Liquidity and Capital Resources
Working Capital
Working capital totaled $407.0 million at September 30, 1997 compared
to $488.2 million at September 30, 1996. Repurchases of the Company's
stock accounted for $64.0 million of the $81.2 million or 17%
decline.
Changes in current assets included an increase of $25.5 million in
accounts receivable resulting primarily from joint venture activities
and timing of sales at year end. Inventories declined $7.9 million
as a result of lower domestic volume and improved inventory turns. A
$6.8 million decrease in prepaid expenses was primarily due to the
collection of a 1996 tax receivable related to the benefit of a
carryback capital loss.
Current assets and liabilities relating to jackpot liabilities
increased in response to the overall growth in progressive systems.
Working capital declined $1.3 million as a result of the net effect
of fluctuations in the assets and liabilities relating to progressive
systems.
The first principal payment on the Company's Senior Notes (see Note 6
of the Notes to Consolidated Financial Statements) is due in
September 1998 resulting in $14.3 million of the $17.3 million
increase in current maturities of long-term notes payable and capital
lease obligations. An increase of $13.1 million in accounts payable
related to timing of payments also contributed to the decrease in
working capital.
Cash Flow
The Company's cash and cash equivalents totaled $151.8 million at
September 30, 1997, an $18.1 million decrease from the prior year
end. Cash flow provided by the Company's operations during 1997 was
used primarily to repurchase the Company's stock.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, (continued)
Cash provided by operating activities for the years ended September
30, 1997, 1996 and 1995 totaled $114.7 million, $55.3 million and
$153.4 million, respectively. During these periods, fluctuations in
receivables and inventories were influenced by sales volumes and
timing and resulted in the most significant changes in cash flow from
operating activities.
The Company's proprietary systems provide cash through collections
from systems to fund jackpot liabilities and use cash to purchase
investments to fund liabilities to jackpot winners. The net cash
provided by these activities was $28.2 million, $4.1 million and
$31.5 million for fiscal 1997, 1996 and 1995, respectively.
Uses of cash from investing activities included purchases of
property, plant, and equipment totaling $33.1 million, $71.6 million
and $43.5 million in fiscal 1997, 1996 and 1995, respectively.
Capital expenditures during these periods related primarily to the
construction of the Company's manufacturing and administrative
facilities in Reno, Nevada. The total cost of the facilities was
$89.5 million. Additionally, purchases of manufacturing and office
equipment to support the Company's expansion contributed to cash used
in investing activities each year. The funds for capital
expenditures anticipated during fiscal 1998 will be derived from the
Company's existing cash flow.
Repurchases of the Company's stock for $225.5 million, $44.9 million
and $56.1 million for the years ended September 30, 1997, 1996 and
1995, respectively, represented the most significant use of cash from
financing activities. The Company used its credit facilities to
provide cash of $63.2 million and $8.0 million in fiscal 1997 and
1996, respectively.
Stock Repurchase Plan
A stock repurchase plan was originally authorized by the Board of
Directors in October 1990. This repurchase program currently allows
the purchase of up to a total of 50.0 million shares of the
Company's common stock. As of September 30, 1997, the Company was
authorized to purchase a remaining 14.8 million shares. During the
fiscal years ended September 30, 1997 and 1996, the Company
repurchased 13.1 million shares for an aggregate purchase price of
$225.5 million and 3.8 million shares for an aggregate purchase
price of $44.9 million, respectively. No treasury stock purchases
were made during the period of October 1, 1997 through November 30,
1997.
Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share." This statement establishes standards for
computing and presenting earnings per share and is effective for the
Company's quarter ending December 31, 1997. Earlier application of
this statement is not permitted and upon adoption requires
restatement of all prior-period earnings per share data presented.
Due to the immaterial impact of potentially dilutive options and the
Company's capital structure, management believes that the
implementation of this standard will not have a significant impact on
earnings per share upon adoption.
On June 30, 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income." This statement requires companies to classify
items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position,
and is effective for the Company's fiscal year ending September 30,
1998. Management intends to comply with the disclosure requirements
of this statement.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, (continued)
On June 30, 1997, the FASB issued SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information." This statement
establishes additional standards for segment reporting in financial
statements and is effective for the Company's fiscal year ending
September 30, 1999. Management intends to comply with the disclosure
requirements of this statement and does not anticipate a material
impact on the results of operations for each segment.
Reclassifications
Certain amounts in the 1996 and 1995 consolidated financial
statements have been reclassified to be consistent with the
presentation used in fiscal year 1997.
Lines of Credit
As of September 30, 1997, the Company had a $250.0 million unsecured
bank line of credit with various interest rate options available to
the Company. The Company is charged a nominal fee on amounts used
against the line as security for letters of credit. Funds available
under this line are reduced by any amounts used as security for
letters of credit. At September 30, 1997, $192.6 million was
available under this line of credit.
IGT-Australia had a $9.8 million bank line of credit available as of
September 30, 1997. Interest is paid at published reference rates
plus a margin of 1% or less. This line is supported by a comfort
letter and guarantee from the Company and has a provision for review
and renewal annually in January. At September 30, 1997, $3.6
million was available under this line.
IGT-Japan had a $5.8 million line of credit available as of
September 30, 1997. The line is supported by a guarantee from the
Company and bears interest at 1.5%. At September 30, 1997,
approximately $2.7 million was available under this line.
The Company is required to comply, and is in compliance, with
certain covenants contained in these line of credit agreements and
its Senior Notes which, among other things, limit financial
commitments the Company may make without the written consent of the
lenders and require the maintenance of certain financial ratios,
minimum working capital and net worth of the Company.
Impact of Inflation
Inflation has not had a significant effect on the Company's
operations during the three fiscal years in the period ended
September 30, 1997.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, (continued)
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The foregoing Management's Discussion and Analysis and other
portions of this report on Form 10-K contain various "forward-
looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Sections 21E of the
Securities Exchange Act of 1934, as amended, which represent the
Company's expectations or beliefs concerning future events,
including the following: statements regarding the estimated total
cost of the Company's new cabinet manufacturing facility; the
statement that the Company believes it is unlikely that it will
incur any losses relating to its guarantee of certain indebtedness
of CMS; the statement that the outcome of pending legal actions will
not have a material adverse effect on the Company's financial
position or results of operations; the statement that the
implementation of the Earnings Per Share standard will not have a
significant impact on earnings per share; the statement that the
implementation of the segments and Related Information standard will
not have a material impact on the results of segment operations; and
the statement that the total cost of changes required to achieve a
year 2000 date conversion are not expected to have a material effect
on the Company's financial statements. In addition, statements
containing expressions such as "believes," "anticipates," "plans" or
"expects" used in the Company's periodic reports on Forms 10-K and
10-Q filed with the SEC are intended to identify forward-looking
statements. The Company cautions that these and similar statements
included in this report and in previously filed periodic reports
including reports filed on Forms 10-K and 10-Q are further qualified
by important factors that could cause actual results to differ
materially from those in the forward-looking statement, including,
without limitation, the following: decline in demand for gaming
products or reduction in the growth rate of new and existing
markets; delays of scheduled openings of newly constructed casinos;
the effect of economic conditions; a decline in the market
acceptability of gaming; unfavorable public referendums or anti-
gaming legislation; delays or lack of funding from regulatory
agencies for racetrack operations; political and economic
instability in developing international markets; a decline in the
demand for replacement machines; a decrease in the desire of
established casinos to upgrade machines in response to added
competition from newly constructed casinos; changes in player appeal
for gaming products; the loss of a distributor; changes in interest
rates causing a reduction of investment income or in the market
interest rate sensitive investments; loss or retirement of key
executives; approval of pending patent applications or infringement
upon existing patents; the effect of regulatory and governmental
actions; unfavorable determination of suitability by regulatory
authorities with respect to officers, directors or key employees;
the limitation, conditioning or suspension of any gaming license;
fluctuations in foreign exchange rates, tariffs and other barriers
and with respect to legal actions, the discovery of facts not
presently known to the Company or determinations by judges, juries
or other finders of fact which do not accord with the Company's
evaluation of the possible liability or outcome of existing
litigation.
<PAGE>
Item 8. Consolidated Financial Statements and Supplementary Data
Index to Financial Statements Page
Independent Auditors' Report 35
Consolidated Statements of Income for the
years ended September 30, 1997, 1996 and 1995 36
Consolidated Balance Sheets,
September 30, 1997 and 1996 37
Consolidated Statements of Cash Flows for the
years ended September 30, 1997, 1996 and 1995 39
Consolidated Statements of Changes in Stockholders'
Equity for the years ended September 30, 1997, 1996 and 1995 41
Notes to Consolidated Financial Statements 42
<PAGE>
Independent Auditors' Report
To the Stockholders and Board of Directors of International Game Technology:
We have audited the accompanying consolidated balance sheets of
International Game Technology and Subsidiaries as of September 30,
1997 and 1996, and the related consolidated statements of income,
cash flows and changes in stockholders' equity for each of the three
years in the period ended September 30, 1997. Our audits also
included the consolidated financial statement schedule listed in the
Index at Item 14(a)(2). These financial statements and financial
statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
International Game Technology and Subsidiaries as of September 30,
1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended September 30,
1997 in conformity with generally accepted accounting principles.
Also, in our opinion, such consolidated financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Reno, Nevada
November 7, 1997
<PAGE>
<TABLE>
Consolidated Statements of Income
<CAPTION>
Years Ended September 30,
1997 1996 1995
(Amounts in thousands except per
share amounts)
<S> <C> <C> <C>
Revenues
Product sales $461,150 $481,652 $416,424
Gaming operations 282,820 251,800 204,362
Total revenues 743,970 733,452 620,786
Costs and Expenses
Cost of product sales 256,480 265,550 233,367
Cost of gaming operations 145,245 139,706 110,779
Selling, general and
administrative 98,380 108,469 88,551
Depreciation and amortization 11,846 12,570 14,380
Research and development 31,074 25,701 28,491
Provision for bad debts 9,508 11,623 5,877
Total costs and expenses 552,533 563,619 481,445
Income from Operations 191,437 169,833 139,341
Other Income (Expense)
Interest income 41,738 39,178 37,575
Interest expense (30,422) (23,535) (20,374)
Gain (loss) on investments 12,885 (4,311) (12,033)
Gain (loss) on the sale of assets (24) (793) 83
Other (2,989) 4,031 172
Other income, net 21,188 14,570 5,423
Income Before Income Taxes 212,625 184,403 144,764
Provision for Income Taxes 75,378 66,386 52,116
Net Income $137,247 $118,017 $ 92,648
Primary Earnings Per Share $ 1.13 $ 0.93 $ 0.71
Fully Diluted Earnings Per Share $ 1.12 $ 0.92 $ 0.71
Weighted Average Common and Common
Equivalent Shares Outstanding 121,829 127,412 131,094
Weighted Average Common Shares
Outstanding Assuming Full
Dilution 122,390 128,160 131,094
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
Consolidated Balance Sheets
<CAPTION>
September 30,
1997 1996
(Dollars in thousands)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 151,771 $ 169,900
Investment securities, at market value 14,944 60,858
Accounts receivable, net of allowances
for doubtful accounts of $5,899 and
$5,681 173,783 148,305
Current maturities of long-term notes
and contracts receivable, net of
allowances 74,686 72,063
Inventories, net of allowances for
obsolescence of $14,881 and $18,165:
Raw materials 50,484 54,600
Work-in-process 3,606 4,316
Finished goods 38,354 41,427
Total inventories 92,444 100,343
Investments to fund liabilities to
jackpot winners 35,088 27,343
Deferred income taxes 18,229 19,354
Prepaid expenses and other 10,601 17,426
Total Current Assets 571,546 615,592
Long-term notes and contracts receivable,
net of allowances and current
maturities 32,524 46,473
Property, plant and equipment, at cost
Land 25,391 25,610
Buildings 74,366 58,574
Gaming operations equipment 66,240 73,641
Manufacturing machinery and equipment 97,564 77,025
Leasehold improvements 5,306 9,960
Construction in progress 1,451 16,136
Total 270,318 260,946
Less accumulated depreciation and
amortization (91,842) (83,144)
Property, plant and equipment, net 178,476 177,802
Investments to fund liabilities to
jackpot winners 313,719 244,340
Deferred income taxes 98,072 65,194
Other assets 20,715 4,786
Total Assets $1,215,052 $1,154,187
</TABLE>
<PAGE>
<TABLE>
Consolidated Balance Sheets
<CAPTION>
September 30,
1997 1996
(Dollars in thousands)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term notes
payable and capital lease obligations $ 25,414 $ 8,119
Accounts payable 46,238 33,145
Jackpot liabilities 42,485 33,489
Accrued employee benefit plan
liabilities 17,147 16,175
Accrued dividends payable 3,411 3,767
Other accrued liabilities 29,893 32,747
Total Current Liabilities 164,588 127,442
Long-term notes payable and capital
lease obligations, net of current
maturities 140,713 107,155
Long-term jackpot liabilities 389,235 292,864
Other liabilities 669 3,526
Total Liabilities 695,205 530,987
Commitments and contingencies - -
Stockholders' equity
Common stock, $.000625 par value;
320,000,000 shares authorized;
151,882,710 and 150,690,308 shares
issued 95 94
Additional paid-in capital 243,950 237,365
Retained earnings 688,597 567,565
Treasury stock; 38,174,676 and
25,114,476 shares, at cost (413,617) (188,143)
Net unrealized gain on investment
securities 822 6,319
Total Stockholders' Equity 519,847 623,200
Total Liabilities and Stockholders'
Equity $1,215,052 $1,154,187
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
<CAPTION>
Years Ended September 30,
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $137,247 $118,017 $ 92,648
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 35,024 30,502 27,896
Provision for bad debts 9,508 11,623 5,877
Provision for inventory obsolescence 10,022 16,550 9,347
(Gain) loss on investments and sale
of assets (12,861) 5,104 11,950
Common stock awards 2,636 1,236 -
(Increase) decrease in assets:
Receivables (25,166) (40,623) 29,929
Inventories (14,260) (63,220) 9,950
Prepaid expenses and other 6,875 (14,069) (3,050)
Other assets (16,084) (2,009) (11,477)
Net deferred income tax asset,
net of tax benefit of stock option
and purchase plans (29,357) (29,187) (27,007)
Increase in accounts payable and
accrued liabilities 11,253 21,272 7,992
Other (134) 65 (699)
Total adjustments (22,544) (62,756) 60,708
Net cash provided by operating
activities 114,703 55,261 153,356
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
<CAPTION>
Years Ended September 30,
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Investing Activities
Investment in property, plant and
equipment (33,088) (71,575) (43,537)
Proceeds from sale of property,
plant and equipment 6,579 4,112 6,806
Purchase of investment securities (27,898) (31,041) (13,861)
Proceeds from sale of investment
securities 78,338 23,524 34,385
Proceeds from investments to fund
liabilities to jackpot winners 36,814 28,179 20,353
Purchase of investments to fund
liabilities to jackpot winners (113,938) (112,999) (61,075)
Net cash used in investing
activities (53,193) (159,800) (56,929)
Cash Flows from Financing Activities
Principal payments on debt (11,425) (8,297) (458)
Payments on jackpot liabilities (36,814) (28,179) (20,353)
Collections from systems to fund
jackpot liabilities 142,181 117,119 92,564
Proceeds from stock options exercised 2,559 2,839 1,920
Proceeds from employee stock
purchases 1,112 1,046 958
Payments for purchase of treasury
stock (225,474) (44,861) (56,121)
Payments of cash dividends (14,526) (15,277) (15,631)
Proceeds from long-term debt 63,185 7,986 -
Net cash provided by (used in)
financing activities (79,202) 32,376 2,879
Effect of Exchange Rate Changes on
Cash and Cash Equivalents (437) 450 (423)
Net Increase (Decrease) in Cash and Cash
Equivalents (18,129) (71,713) 98,883
Cash and Cash Equivalents at:
Beginning of Year 169,900 241,613 142,730
End of Year $ 151,771 $ 169,900 $241,613
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
Consolidated Statements of Changes in Stockholders' Equity
<CAPTION>
Years Ended September 30,
1997 1996 1995
(Amounts in thousands)
<S> <C> <C> <C>
Common Stock
Balance at beginning of year
150,690; 150,119; and 149,466
shares $ 94 $ 94 $ 93
Stock options exercised and other
1,193; 571; and 653 shares 1 - 1
Balance at end of year
151,883 shares at 1997 $ 95 $ 94 $ 94
Additional Paid-In Capital
Balance at beginning of year $ 237,365 $ 231,338 $ 226,712
Stock options exercised and other 3,671 3,885 2,877
Common stock awards 2,636 1,236 -
Tax benefit of stock options 278 906 1,749
Balance at end of year $ 243,950 $ 237,365 $ 231,338
Retained Earnings
Balance at beginning of year $ 567,565 $ 463,039 $ 385,511
Currency translation adjustments (2,022) 1,687 769
Dividends declared (14,193) (15,178) (15,889)
Net income 137,247 118,017 92,648
Balance at end of year $ 688,597 $ 567,565 $ 463,039
Treasury Stock
Balance at beginning of year $(188,143) $(143,281) $ (87,160)
Purchase of treasury stock (225,474) (44,862) (56,121)
Balance at end of year $(413,617) $(188,143) $(143,281)
Net Unrealized Gain (Loss) on Investment
Securities
Balance at beginning of year $ 6,319 $ 2,900 $ (4,288)
Net unrealized loss on investment
securities at October 1, 1994 - - (649)
Increase (decrease) in net unrealized
gain on investment securities (5,497) 3,419 1,808
Recognized loss on investment
security - - 6,029
Balance at end of year $ 822 $ 6,319 $ 2,900
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
<PAGE>
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting
Policies
Nature of Operations
International Game Technology (the "Company") was incorporated in
December 1980 to acquire the gaming licensee and operating entity,
IGT, and to facilitate the Company's initial public offering. The
Company operates principally in two lines of business: the
manufacture and sale of gaming products (product sales) and
proprietary systems and gaming equipment leasing (gaming
operations). The majority of the Company's revenues are generated
in the U.S. and Canada. Internationally, the Company sells its
products in Africa, Australia, Europe, Japan and South America.
IGT is one of the largest manufacturers of computerized casino
gaming products and proprietary gaming systems in the world. The
Company believes it manufactures the broadest range of
microprocessor-based gaming machines available. The Company also
develops and manufactures wide area progressive systems and systems
which monitor slot machine play and track player activity. In
addition to gaming product sales and leases, the Company has
developed and sells computerized linked proprietary systems to
monitor video lottery terminals and has developed specialized video
lottery terminals for lotteries and other applications. The Company
derives revenues related to the operations of these systems as well
as collects license and franchise fees for the use of the systems.
Unless the context indicates otherwise, references to "International
Game Technology," "IGT" or the "Company" include International Game
Technology and its wholly-owned subsidiaries and their subsidiaries.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and all of its majority-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated.
Product Sales
The Company makes product sales for cash, on normal credit terms of
90 days or less, over longer term installments, and through
participation in the net winnings of the machines until the purchase
price is paid. Generally, sales are recorded when the products are
shipped and title passes to the customer.
Gaming Operations
<TABLE>
The following table shows the revenues recorded from gaming
operations.
<CAPTION>
Years Ended September 30,
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Proprietary Systems $253,953 $234,859 $191,607
Lease Operations 28,867 16,941 12,755
Total $282,820 $251,800 $204,362
</TABLE>
Gaming operations revenues consist of revenues relating to the
operations of the proprietary systems, a share of the net gaming
winnings from the operation of machines at customer locations, and
the lease and rental of gaming and video lottery machines. The
Company operates several proprietary systems in accordance with
joint venture agreements and accounts for this activity under the
equity method. The Company's portion of joint venture related
income, net of expenses, is also included in gaming operations
revenue.
The Company's linked proprietary systems are operated in Colorado,
Louisiana, Mississippi, Missouri, Nevada, New Jersey, South Dakota
and in Native American casinos and internationally in Iceland and
Macau.
<PAGE>
Notes to Consolidated Financial Statements, (continued)
In Atlantic City, each system is operated by an independent trust
managed by representatives from the participating casinos. The
trust records a liability to the Company for annual casino fees as
well as machine rental fees. Payments to jackpot winners are made
by the trust. Revenue from systems products installed in New Jersey
casinos is not recognized until receipt is assured.
In Louisiana, Mississippi, Missouri, Nevada, South Dakota and the
Native American casinos, the systems are provided by the Company and
the casinos pay a percentage of play to the Company. In Colorado,
the Company provides the systems and charges the casinos a machine
rental and service fee. The Company recognizes the amounts received
from the casinos as revenue. In these jurisdictions, the jackpots
resulting from progressive system play are a legal liability of the
Company under the systems operating agreements. The jackpots are
paid in ten to thirty-one equal annual installments without
interest. The Company records the cost of investments to fund the
annual jackpot payments to winners as a part of gaming operations
expense. These costs totaled $115.6 million, $113.1 million and
$88.8 million during the years ended September 30, 1997, 1996 and
1995, respectively.
In Macau and Iceland, the Company receives a percentage of the net
win.
Research and Development
Research and development costs are expensed as incurred.
Cash and Cash Equivalents
Cash and cash equivalents include operating cash and cash required
for funding current systems jackpot payments as well as purchasing
investments to meet obligations for making payments to jackpot
winners. Cash in excess of daily requirements is generally invested
in various marketable securities. If these securities have original
maturities of three months or less, they are considered cash
equivalents. Such investments are stated at cost, which
approximates market.
Investment Securities
The Company's investment securities have been classified as
available-for-sale and stated at market value, with unrealized gains
and losses, net of income tax effects, excluded from income and
reported as a separate component of stockholders' equity. Market
value is determined by the most recently traded price of the
security at the balance sheet date. Net realized gains or losses
are determined on the specific identification cost method.
Inventories
Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Depreciation and Amortization
Depreciation and amortization are provided on the straight-line
method over the following useful lives:
Buildings 40 years
Gaming operations equipment 2 to 5 years
Manufacturing machinery and equipment 3 to 8 years
Leasehold improvements Term of lease
Maintenance and repairs are expensed as incurred. The costs of
improvements are capitalized. Gains or losses on the disposition of
assets are included in income.
<PAGE>
Notes to Consolidated Financial Statements, (continued)
Investments to Fund Liabilities to Jackpot Winners
These investments represent discounted U.S. Treasury Securities
purchased to meet obligations for making payments to linked
progressive systems jackpot winners. The Company has both the
intent and ability to hold these investments to maturity and,
therefore, has classified them as held-to-maturity. Accordingly,
these investments are stated at cost, adjusted for amortization of
premiums and accretion of discounts over the term of the security
using the interest method. There were no gross unrealized losses or
gains at September 30, 1997. Securities in this portfolio have
maturity dates through 2022.
Other Assets
Other assets is primarily comprised of investments in joint ventures
which are accounted for under the equity method. Other assets also
includes deposits, patents, software and certain investments.
Patents are amortized over seven years. Software is amortized over
five years.
Earnings Per Share
Earnings per share is computed based upon the weighted average
number of common and common equivalent shares outstanding.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Foreign Currency Translation
The financial statements of foreign subsidiaries have been
translated into U.S. dollars for consolidated reporting purposes in
accordance with SFAS No. 52. All asset and liability accounts have
been translated using the current exchange rate at the balance sheet
date. Income statement amounts have been translated using the
average exchange rate for the year. The gains and losses resulting
from the translation adjustments have been accumulated as a
component of stockholders' equity and netted against retained
earnings due to the immateriality of the amounts. The effect on the
consolidated statements of operations of translation gains and
losses is insignificant for all years presented.
Recently Issued Accounting Standards
In February 1997, the FASB issued SFAS No. 128, "Earnings Per
Share." This statement establishes standards for computing and
presenting earnings per share and is effective for the Company's
quarter ending December 31, 1997. Earlier application of this
statement is not permitted and upon adoption requires restatement of
all prior-period earnings per share data presented. Due to the
immaterial impact of potentially dilutive options and the Company's
capital structure, management believes that the implementation of
this standard will not have a significant impact on earnings per
share upon adoption.
On June 30, 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income." This statement requires companies to
classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of
financial position, and is effective for the Company's fiscal year
ending September 30, 1998. Management intends to comply with the
disclosure requirements of this statement.
<PAGE>
Notes to Consolidated Financial Statements, (continued)
On June 30, 1997, the FASB issued SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information." This statement
establishes additional standards for segment reporting in the
financial statements and is effective for the Company's fiscal year
ending September 30, 1999. Management intends to comply with the
disclosure requirements of this statement and does not anticipate a
material impact on the results of operations for each segment.
Reclassifications
Certain amounts in the 1996 and 1995 consolidated financial
statements have been reclassified to be consistent with the
presentation used in fiscal year 1997.
2. Investment Securities
<TABLE>
A summary of investment securities at September 30, 1997 follows:
<CAPTION>
Gross Gross
Net Unrealized Unrealized Market
September 30, 1997 Cost Gains Losses Value
(Dollars in thousands)
<S> <C> <C> <C> <C>
Corporate bonds $ 6,454 $ 96 $ - $ 6,550
Equity securities 7,225 1,299 (130) 8,394
Total investment securities $13,679 $1,395 $(130) $14,944
</TABLE>
At September 30, 1997, debt securities had maturity dates ranging
from one month to 26 years.
<TABLE>
A summary of investment securities at September 30, 1996 follows:
<CAPTION>
Gross Gross
Net Unrealized Unrealized Market
September 30, 1996 Cost Gains Losses Value
(Dollars in thousands)
<S> <C> <C> <C> <C>
United States Government and
agency obligations $ 9,004 $ 24 $ (18) $ 9,010
Corporate bonds 13,438 614 (85) 13,967
Equity securities 28,694 9,257 (70) 37,881
Total investment securities $51,136 $9,895 $(173) $60,858
</TABLE>
At September 30, 1996 debt securities had maturity dates ranging
from three months to ten years.
The proceeds from sales of available-for-sale securities were $78.3
million, $23.5 million and $34.4 million for fiscal 1997, 1996 and
1995, respectively. The gross realized gains were $13.6 million,
$472,000 and $3.0 million for fiscal 1997, 1996 and 1995,
respectively. The gross realized losses were $574,000, $205,000 and
$886,000 for fiscal 1997, 1996 and 1995, respectively.
3. Notes and Contracts Receivable
The Company grants customers extended payment terms under contracts
of sale. These contracts are generally for terms of one to five
years, with interest recognized at prevailing rates, and are secured
by the related equipment sold.
<PAGE>
Notes to Consolidated Financial Statements, (continued)
The Company has provided loans, principally for financial
assistance, to several customers. At September 30, 1997 and 1996,
the balance of such loans totaled $2.9 million and $3.9 million,
respectively. Allowances for doubtful loans at September 30, 1997
totaled $351,000. There were no allowances for doubtful loans as of
September 30, 1996. These loans are generally for terms of one to
five years with interest at prevailing rates.
<TABLE>
The following table represents the estimated future collections of
notes and contracts receivable (net of allowances) at September 30,
1997:
<CAPTION>
Years Ending September 30, Estimated Receipts
(Dollars in thousands)
<S> <C>
1998 $ 74,686
1999 26,571
2000 4,223
2001 1,449
2002 104
2003 and after 177
$107,210
</TABLE>
<TABLE>
At September 30, 1997 and 1996, the following allowances for
doubtful notes and contracts were netted against current and long-
term maturities:
<CAPTION>
September 30,
1997 1996
(Dollars in thousands)
<S> <C> <C>
Current $ 8,605 $ 4,538
Long-term 9,624 15,237
$18,229 $19,775
</TABLE>
4. Concentrations of Credit Risk
The financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents and accounts, contracts, and notes receivable. At
September 30, 1997, the Company had bank deposits in excess of
insured limits of approximately $26.6 million.
<TABLE>
Product sales and the resulting receivables are concentrated in
specific legalized gaming regions. The Company also distributes a
portion of its products through third party distributors resulting in
significant distributor receivables. Accounts, contracts, and notes
receivable by region as a percentage of total receivables are as
follows:
<CAPTION>
September 30, 1997
<S> <C>
Region
Nevada 39.6%
Riverboats (greater Mississippi River area) 18.4%
Native American casinos (distributor) 9.8%
South America 9.2%
Australia 6.2%
New Jersey (distributor) 4.5%
Colorado 3.7%
Canada 3.2%
Other regions (individually less than 3%) 5.4%
Total 100.0%
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements, (continued)
5. Corporate Headquarters and Manufacturing Facility
In May 1994, the Company purchased a 78 acre site in Reno, Nevada
for approximately $6.0 million for the construction of an
approximately 1.0 million square foot corporate headquarters,
manufacturing and warehousing facility and cabinet manufacturing
facility (the "South Meadows" facility). The manufacturing and
warehousing facility was completed in January 1996, and the
corporate offices were completed in March 1997. Substantially all
employees in Reno, Nevada now work at the facilities. The total
cost of these facilities, including the site, was $89.3 million.
The Company has started construction of an 85,000 square foot
cabinet manufacturing facility adjacent to the South Meadows
facility, which is expected to be completed in the spring of 1998 at
an estimated cost of $5.5 million.
6. Notes Payable and Capital Lease Obligations
Senior Notes
In September 1994, the Company completed a $100.0 million private
placement of 7.84% Senior Notes (the "Senior Notes"). The Senior
Notes require annual principal payments of $14.3 million commencing
in September 1998 through 2003 and a final principal payment of
$14.2 million in September 2004. Interest is paid quarterly. The
Senior Notes contain covenants which limit the financial commitments
the Company may make and require the maintenance of a minimum level
of consolidated net worth. The net proceeds from the Senior Notes
of $99.6 million were used to finance the construction of a new
manufacturing and headquarters facility and for general corporate
purposes.
Australian Cash Advance Facility
In August 1994, the Company was advanced $13.1 million from an
Australian bank under a cash advance facility. $10.9 million has
been repaid in accordance with the agreement. A principal payment
of $2.2 million is due June 30, 1998. Interest is paid quarterly.
The proceeds of the loan were used to acquire manufacturing and
administrative facilities in Sydney, Australia.
Lines of Credit
As of September 30, 1997, the Company had a $250.0 million unsecured
bank line of credit with various interest rate options available to
the Company. The Company is charged a nominal fee on amounts used
against the line as security for letters of credit. Funds available
under this line are reduced by any amounts used as security for
letters of credit. At September 30, 1997, $192.6 million was
available under this line of credit.
IGT-Australia had a $9.8 million bank line of credit available as of
September 30, 1997. Interest is paid at published reference rates
plus a margin of 1% or less. This line is supported by a comfort
letter and guarantee from the Company and has a provision for review
and renewal annually in January. At September 30, 1997, $3.6
million was available under this line.
IGT-Japan had a $5.8 million line of credit available as of
September 30, 1997. The line is supported by a guarantee from the
Company and bears interest at 1.5%. At September 30, 1997,
approximately $2.7 million was available under this line.
The Company is required to comply, and is in compliance, with
certain covenants contained in these agreements which, among other
things, limit financial commitments the Company may make without the
written consent of the lenders and require the maintenance of
certain financial ratios, minimum working capital and net worth of
the Company.
<PAGE>
Notes to Consolidated Financial Statements, (continued)
<TABLE>
Notes payable and capital lease obligations consist of the
following:
<CAPTION>
September 30,
1997 1996
(Dollars in thousands)
<S> <C> <C>
Senior notes $100,000 $100,000
Lines of credit 57,741 -
Australian cash advance facility
and line of credit 8,347 15,037
Capital lease obligations (see Note 7) 39 144
Other notes payable - 93
Total 166,127 115,274
Less current maturities 25,414 8,119
Long-term notes payable and capital
lease obligations, net of current
maturities $140,713 $107,155
</TABLE>
<TABLE>
The following table represents the future fiscal year principal
payments of these notes and capital lease obligations at September
30, 1997:
<CAPTION>
Years Ending September 30, Principal Payments
(Dollars in thousands)
<S> <C>
1998 $ 25,414
1999 69,313
2000 14,300
2001 14,300
2002 14,300
2003 and after 28,500
$166,127
</TABLE>
7. Commitments
<TABLE>
The Company leases certain of its facilities and equipment under
various agreements for periods through the year 2003. The following
table shows the future minimum rental payments required under these
operating and capital leases which have initial or remaining non-
cancelable lease terms in excess of one year as of September 30,
1997.
<CAPTION>
Operating Capital
Years Ending September 30, Leases Leases Total
(Dollars in thousands)
<S> <C> <C> <C>
1998 $ 4,304 $28 $ 4,332
1999 2,825 13 2,838
2000 2,609 2,609
2001 2,186 2,186
2002 1,054 1,054
2003 and after 92 92
Total minimum payments $13,070 41 $13,111
Amount representing interest (2)
Capital lease obligations 39
Less current portion 26
Long-term capital lease obligations $13
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements, (continued)
The cost and related accumulated depreciation of equipment under
capital leases as of September 30, 1997 was $155,000 and $76,000
respectively, and at September 30, 1996, was $446,000 and $336,000,
respectively.
Certain of the leases provide that the Company pay utilities,
maintenance, property taxes, and certain other operating expenses
applicable to the leased property, including liability and property
damage insurance. The lease term for the Company's recently vacated
manufacturing facility in Reno, Nevada extends through November 2002
and the related payments are included in the schedule above. The
Company has subleased approximately half of this facility to third
parties. The terms of the sublease agreements call for payments of
$4.0 million for the period of November 1997 through November 2002.
The Company has accrued $4.5 million for the future gross lease
payments of these abandoned buildings, net of anticipated sublease
receipts.
The total rental expense for the fiscal years ended September 30,
1997, 1996 and 1995 was approximately $3.6 million, $6.4 million,
and $6.8 million, respectively.
8. Liabilities to Jackpot Winners
<TABLE>
From the Colorado, Louisiana, Mississippi, Missouri, Native
American, Nevada and South Dakota systems, the Company receives a
percentage of the amount played or machine rental and service fees
from the linked progressive systems to fund the related jackpot
payments. The jackpots are paid in ten to thirty-one equal annual
installments without interest. The following schedule sets forth
the future fiscal year payments for the jackpot winners under these
systems at September 30, 1997:
<CAPTION>
Years Ending September 30, Payments
(Dollars in thousands)
<S> <C>
1998 $ 35,388
1999 35,388
2000 35,388
2001 35,388
2002 35,388
2003 and after 423,708
$600,648
</TABLE>
<TABLE>
Jackpot liabilities in the amount of the present value of the
jackpots are recorded concurrently with the recognition of the
related revenue. Jackpot liabilities include discounted payments
due to winners for jackpots won and amounts accrued for jackpots not
yet won that are contractual obligations of the Company. Jackpot
liabilities consist of the following:
<CAPTION>
September 30,
1997 1996
(Dollars in thousands)
<S> <C> <C>
Gross payments due to jackpot winners $ 600,648 $ 452,397
Unamortized discount on payments to jackpot winners (249,603) (178,664)
Accrual for jackpots not yet won 80,675 52,620
Total jackpot liabilities 431,720 326,353
Less current liability (42,485) (33,489)
Long-term jackpot liabilities $ 389,235 $ 292,864
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements, (continued)
The Company amortizes the discounts on the liabilities, recognizing
it as interest expense, and records commensurate interest income on
the investments purchased to fund the payments to the jackpot
winners. During fiscal 1997, 1996 and 1995, the Company recorded
interest expense on jackpot liabilities of $21.2 million, $16.0
million and $12.1 million, respectively. The Company is required to
maintain cash and investments relating to systems liabilities in
separate accounts.
9. Fair Value of Financial Instruments
<TABLE>
The following table presents the carrying amount and estimated fair
value of the Company's financial instruments in accordance with SFAS
No. 107, "Disclosures about Fair Value of Financial Instruments."
<CAPTION>
Carrying Estimated
September 30, 1997 Amount Fair Value
(Dollars in thousands)
<S> <C> <C>
Assets:
Cash and cash equivalents $151,771 $151,771
Investment securities 14,944 14,944
Notes and contracts receivable 107,210 124,407
Investments to fund liabilities to
jackpot winners 348,807 361,082
Liabilities:
Jackpot liabilities 431,720 454,829
Notes payable and capital lease
obligations 166,127 170,490
</TABLE>
<TABLE>
<CAPTION>
Carrying Estimated
September 30, 1996 Amount Fair Value
(Dollars in thousands)
<S> <C> <C>
Assets:
Cash and cash equivalents $169,900 $169,900
Investment securities 60,858 60,858
Notes and contracts receivable 118,536 139,004
Investments to fund liabilities to
jackpot winners 271,683 273,445
Liabilities:
Jackpot liabilities 326,353 328,154
Notes payable and capital lease
obligations 115,274 118,073
</TABLE>
The carrying value of cash and cash equivalents approximates fair
value because of the short term maturity of those instruments. The
estimated fair value of investment securities and investments to
fund liabilities to jackpot winners are based on quoted market
prices. The estimated fair value of jackpot liabilities is based on
quoted market prices of investments which upon maturity will be used
to fund these liabilities. The estimated fair value of the Senior
Notes, included in notes payable and capital lease obligations at
September 30, 1997 and 1996, was based on the yield required at
September 30, 1997 and 1996, respectively, of a private placement of
similar terms and credit valuation.
The fair value of the Company's notes and contracts receivable is
estimated by discounting the future cash flows using interest rates
determined by management to reflect the credit risk and remaining
maturities of the related notes and contracts.
<PAGE>
Notes to Consolidated Financial Statements, (continued)
In the normal course of business, the Company is a party to
financial instruments with off-balance-sheet risk such as
performance bonds and other guarantees, which are not reflected in
the accompanying balance sheets. At September 30, 1997 and 1996,
the Company had performance bonds outstanding totaling $2.2 million
and $3.4 million, respectively, relating to the Company's operation
of two lottery systems and a gaming machine route. The Company is
liable to reimburse the bond issuer in the event the bond is
exercised as a result of the Company's non-performance. At
September 30, 1997 and 1996, the Company had outstanding letters of
credit, issued under the Company's line of credit (see Note 6),
totaling $2.4 million and $2.0 million, respectively, which were
issued to insure payment by the Company to certain vendors and
governmental agencies. Management does not expect any material
losses to result from these off-balance-sheet instruments.
The Company is a guarantor on certain indebtedness of CMS
International which had aggregate outstanding balances of $14.8
million and $15.6 million at September 30, 1997 and 1996,
respectively. Summit International has agreed to indemnify and hold
the Company harmless against any liability arising under these
guarantees. Management believes it is unlikely that the Company
will incur losses relating to these guarantees.
10. Contingencies
The Company has been named in and has brought lawsuits in the normal
course of business. Management does not expect the outcome of these
suits, including the lawsuit described below, to have a material
adverse effect on the Company's financial position or results of
future operations.
The Company is a defendant in three class action lawsuits, one filed
in the United States District Court of Nevada, Southern Division,
entitled Larry Schreier v. Caesar's World, Inc., et al., and two
filed in the United States District Court of Florida, Orlando
Division, entitled Poulos v. Caesar's World, Inc., et al. and Ahern
v. Caesar's World, Inc., et al., which have been consolidated in a
single action. Also named as defendants in these actions are many,
if not most, of the largest gaming companies in the United States,
and certain other gaming equipment manufacturers. Each complaint is
identical in its material allegations. The actions allege that the
defendants have engaged in fraudulent and misleading conduct by
inducing people to play video poker machines and electronic slot
machines, based on false beliefs concerning how the machines operate
and the extent to which there is actually an opportunity to win on a
given play. The complaints allege that the defendants' acts
constitute violations of the Racketeer Influenced and Corrupt
Organizations Act, and also give rise to claims for common law fraud
and unjust enrichment, and seeks compensatory, special
consequential, incidental and punitive damages of several billion
dollars.
In response to the Poulos and Ahern complaints, all of the
defendants, including the Company, filed motions to transfer venue.
The Court granted the defendants' motion to transfer venue of the
action to Las Vegas. The defendants also filed motions to dismiss
the actions challenging the pleadings for failure to state a claim
and seeking to dismiss the complaints for lack of personal
jurisdiction and venue. The Court granted the defendants' motions to
dismiss, with leave to amend the pleadings. The plaintiffs filed
amended pleadings and the defendants again filed motions to dismiss.
Thereafter, at a status conference in Las Vegas on December 13, 1996,
United States District Court Judge David A. Ezra, a visiting judge
who has now been assigned all three pending cases identified above,
ordered that the plaintiffs in all three cases file a new
consolidated complaint incorporating in one document all claims
against all defendants. All then pending motions from all parties
were ordered deemed as withdrawn without prejudice. The new
consolidated complaint was filed in February 1997. Thereafter, the
defendants timely filed both a Motion to Strike Plaintiff's
Consolidated Amended Complaint based on it exceeding the court's
explicit directions and also a renewed Motion to Dismiss for the same
reasons that a similar motion had been granted previously. On
November 3, 1997, Judge Ezra heard oral argument on all pending
motions filed by the defendants. Rulings are expected on these
motions in December 1997.
<PAGE>
Notes to Consolidated Financial Statements, (continued)
11. Income Taxes
SFAS No. 109 requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns.
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax
purposes, and (b) operating loss and tax credit carryforwards. The
Company determines the net current deferred tax asset or liability
and the net noncurrent asset or liability separately for federal,
state, and foreign jurisdictions.
<TABLE>
The effective income tax rates differ from the statutory United
States federal income tax rates as follows:
<CAPTION>
Years Ended September 30,
1997 1996 1995
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
Taxes at federal statutory
rate $74,419 35.0% $64,545 35.0% $50,667 35.0%
Foreign subsidiaries tax (158) 0.0 3,855 2.1 15 0.0
State income tax, net 2,084 1.0 2,834 1.5 1,431 1.0
Foreign sales corporation (1,380) (.7) (1,567) (0.8) (577) (0.4)
Other, net 413 .2 (3,281) (1.8) 580 0.4
Provision for income taxes $75,378 35.5% $66,386 36.0% $52,116 36.0%
</TABLE>
<TABLE>
Components of the provision for income taxes were as follows:
<CAPTION>
Years Ended September 30,
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Current
Federal $102,171 $ 90,992 $ 93,919
State 3,632 3,898 3,778
Foreign 1,652 4,076 (3,780)
Total current 107,455 98,966 93,917
Deferred
Federal (30,283) (28,493) (39,494)
State (308) (1,225) (2,119)
Foreign (1,486) (2,862) (188)
Total deferred (32,077) (32,580) (41,801)
Provision for income taxes $ 75,378 $ 66,386 $ 52,116
</TABLE>
Pre-tax income subject to United States taxation totaled $200.8 million,
$178.0 million and $140.6 million for fiscal 1997, 1996 and 1995,
respectively. Pre-tax income subject to foreign taxation totaled
$11.8 million, $6.4 million and $4.1 million for fiscal 1997, 1996
and 1995, respectively.
<PAGE>
Notes to Consolidated Financial Statements, (continued)
<TABLE>
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<CAPTION>
September 30,
1997 1996
(Dollars in thousands)
<S> <C> <C>
Deferred tax liabilities
Difference between book and tax
basis of property $ (1,301) $(1,128)
Unrealized gain on investment
securities (443) (3,076)
Other (267) (1,334)
(2,011) (5,538)
Deferred tax assets
Receivable reserve 6,963 8,020
Reserves not currently deductible 4,690 5,936
Reserve differential for gaming
activities 88,074 59,028
Foreign subsidiaries 10,495 9,562
State income taxes 2,971 1,492
Other 5,119 6,048
118,312 90,086
Net deferred tax asset $116,301 $84,548
Reflected in the consolidated
balance sheets as:
Current deferred asset $ 18,229 $19,354
Noncurrent deferred asset 98,072 65,194
Net deferred tax asset $116,301 $84,548
</TABLE>
12. Employee Benefit Plans
Employee Incentive Plans
Under a discretionary program effective January 1, 1986 and
reviewable annually by the Company's Board of Directors, the Company
contributed 11% of consolidated operating profits before incentives
(excluding IGT-Australia) equally to the following three employee
incentive plans: profit sharing and 401(k) plan; cash sharing; and
management bonus. The total annual contributions under all three
plans were $22.7 million, $21.8 million, and $17.5 million in fiscal
1997, 1996 and 1995, respectively.
The profit sharing plan was originally adopted in 1980 for the
Company's employees working in the United States. Benefits vest over
a seven year period of employment. Effective January 1, 1993, the
Company began distributing a portion of the profit sharing plan
contribution under a 401(k) retirement plan matching program. Per
the plan agreement, the Company matches 100% of employee
contributions up to $500 and an additional 50% of the next $500
contributed by the employee. This allows for maximum annual Company
contributions of $750 to each employee's 401(k) account. These
contributions vest immediately. In fiscal 1997, 1996, and 1995, the
Company match portion of the total profit sharing contribution was
$933,000, $913,000, and $938,000, respectively. The Company's
foreign subsidiaries have similar retirement plans.
The cash sharing plan calls for semi-annual distributions to all non
IGT-Australia employees. IGT-Australia has a similar plan designed
as a superannuation program. The management bonuses are paid out
annually to key employees throughout the Company.
<PAGE>
Notes to Consolidated Financial Statements, (continued)
Stock-Based Compensation Plans
The Company has three stock-based compensation plans, which are
described below.
Employee Stock Purchase Plan
Effective February 26, 1987, the Company adopted a Qualified
Employee Stock Purchase Plan. Under this Plan, each eligible
employee may be granted an option to purchase a specific number of
shares of the Company's common stock. The term of each option is 12
months, and the exercise date is the last day of the option period.
Only those employees who have completed 12 months of continuous
service with the Company are eligible. Employees who are officers,
5% or more shareholders, employees receiving more than $80,000 in
annual compensation and employees of certain subsidiaries are
excluded.
An aggregate of 2.4 million shares may be made available under this
plan. Employees may participate in this plan only through payroll
deductions up to a maximum of 10% of their base pay. The option
price is equal to the lesser of 85% of the fair market value of the
common stock on the date of grant or on the date of exercise.
795,000 shares were available under this plan at September 30, 1997.
Restricted Stock Awards
In March 1996, 600,000 shares were issued to six employees at a
price of $.01 per share. In accordance with employment agreements,
two of these restricted stock awards vest in two equal installments
upon the second and third anniversaries of the award and the other
four vest in three equal installments upon the second, third and
fifth anniversaries of the award. Dividends on the shares issued
are paid to the employees. The unvested shares issued to the
employees are subject to repurchase by the Company at $.01 per share
if the employee's employment terminates for certain reasons prior to
the vesting of such shares.
In February 1997, the Company amended the 1993 Stock Option Plan to
permit the grant of restricted stock awards of a fixed number of
shares to participants determined by the Company's Board of
Directors. Restricted stock awarded to a participant may not be
voluntarily or involuntarily sold, assigned, transferred, pledged or
encumbered during the restricted period. 200,000 shares were
awarded to participants in fiscal 1997 at a price of $.01 per share
as determined by the Board of Directors. 40% of these restricted
shares will vest in August 1999 and the remainder will vest in
August 2001.
Stock Option Plans
In 1981, the Company adopted a Stock Option Plan under which
nonqualified and incentive stock options to purchase up to 27.1
million shares may be granted. This plan expired in December 1996.
In 1993, the Company adopted an additional Stock Option Plan under
which nonqualified and incentive stock options to purchase up to 5.0
million shares may be granted to employees and up to 250,000
nonqualified stock options may be granted to non-employee directors
of the Company.
Options have been granted at fair market value on the date of grant
and, except for non-employee director options, typically vest
ratably over five years although a shorter period may be provided,
and expire 10 years subsequent to the grant. At September 30, 1997,
options to purchase 1.3 million shares were available for grant
under the plans.
<PAGE>
Notes to Consolidated Financial Statements, (continued)
<TABLE>
In May 1995, the Company offered to reprice outstanding options to
$12.75 per share. Pursuant to such agreement, options to purchase
approximately 1.3 million shares were exchanged. The newly granted
options are exercisable over a five-year period.
<CAPTION>
Number Weighted Average
of Shares Exercise Price
<S> <C> <C>
Outstanding at September 30, 1994 3,519,755 $15.58
Granted 2,269,120 $13.85
Forfeited or expired (1,736,426) $23.69
Exercised (572,047) $ 3.36
Outstanding at September 30, 1995 3,480,402 $12.64
Granted 2,581,189 $13.59
Forfeited or expired (1,327,561) $16.78
Exercised (482,995) $ 5.86
Outstanding at September 30, 1996 4,251,035 $12.64
Granted 1,876,361 $18.07
Forfeited or expired (271,557) $13.98
Exercised (299,102) $ 8.56
Outstanding at September 30, 1997 5,556,737 $14.56
Options exercisable at September 30,
1997 2,366,978 $12.76
1996 764,285 $ 8.93
1995 1,052,016 $ 9.85
</TABLE>
Valuation of Stock-Based Compensation Plans
The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation" on October 1, 1996. As permitted by SFAS No. 123, the
Company continues to apply Accounting Principles Board Opinion No.
25 to its stock-based compensation. Accordingly, no compensation
expense has been recognized for the stock option and employee stock
purchase plan. The compensation expense that has been charged
against income for the restricted stock award plan was $2.6 million
and $1.2 million for fiscal 1997 and 1996, respectively. SFAS No.
123 requires compensation expense to be measured based on the fair
value of the equity instrument awarded.
<PAGE>
Notes to Consolidated Financial Statements, (continued)
<TABLE>
If compensation expense for the Company's three stock-based
compensation plans had been determined in accordance with SFAS No.
123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts shown below.
<CAPTION>
Years Ended September 30,
1997 1996
(Dollars in thousands, except
per share amounts)
<S> <C> <C>
Net income
As reported $137,247 $118,017
Pro forma 132,506 115,251
Primary earnings per share
As reported $ 1.13 $ 0.93
Pro forma 1.09 0.90
Fully diluted earnings per share
As reported $ 1.12 $ 0.92
Pro forma 1.08 0.90
Weighted average fair value of
options granted during the year $ 6.27 $ 3.98
Weighted average fair value of
restricted stock awards granted
during the year $ 18.24 $ 14.16
</TABLE>
The fair value for stock-based compensation was estimated at the
date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 1997 and 1996,
respectively: interest rates (zero-coupon U.S. government issues
with a remaining life of 1.5 years) of 5.6% and 5.1%; dividend
yields of .71% and .73%; volatility factors of the expected market
price of the Company's common stock of .44 and .46; weighted-average
expected life of stock options of 1.5 years and an expected life of
1.0 years for employee stock purchases.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the
Company's employee stock based compensation has characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the
fair value of its employee stock based compensation.
13. Related Party Transactions
<TABLE>
Related party transactions included in the consolidated financial
statements are as follows:
<CAPTION>
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Years Ended September 30,
Total revenues $35,601 $11,843 $21,864
September 30,
Accounts receivable $25,433 $ 1,151 $ 663
Current maturities of
long-term notes and contracts
receivable 1,831 2,911 8,744
Long-term notes and contracts
receivable 123 2,474 2,801
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements, (continued)
The Company has entered into a number of joint venture agreements
(the "Ventures") with various gaming or gaming related companies.
Activities of these Ventures include placement of progressive system
and other participation games, pursuit of video lottery
opportunities of pari-mutuel based wagering. The Company owns a 50%
share in each of the Ventures and recognized net revenues of $13.2
million during fiscal 1997. During the year, $28.4 million in asset
and expense transfers and $538,000 in capital contributions were
made to the Ventures. At September 30, 1997, the Company had
accounts receivable balances from these Ventures of $24.3 million.
The largest aggregate amount of indebtedness outstanding at any time
during the year was $24.3 million.
A member of the Company's Board of Directors is an officer of, and
has an equity interest in, a Nevada gaming business from which the
Company recognized revenues of $956,000, $536,000 and $1.8 million
during the fiscal years ended September 30, 1997, 1996 and 1995,
respectively. The Company had contracts and accounts receivable
balances from this customer of $243,000 and $357,000 at September
30, 1997 and 1996, respectively. The largest amount of indebtedness
outstanding during the year was $415,000. He is also a director and
officer of the parent company of additional gaming businesses, from
which the Company recognized revenues of $21.5 million, $11.3
million, and $19.9 million during the fiscal years ended September
30, 1997, 1996 and 1995, respectively. The Company had contracts
and accounts receivable balances from these businesses of $1.3
million and $3.7 million at September 30, 1997 and 1996,
respectively. The largest aggregate amount of indebtedness
outstanding at anytime during the year was $10.6 million.
Effective October 1, 1993, the Company entered into an Agreement
with National Holdings, Inc. ("NHI") to form IGT-NHI Joint Venture
Company ("IGT-NHI") to engage in the business of supplying and
operating bingo halls and electronic gaming devices in the Peoples
Republic of China. Prior to the dissolution of IGT-NHI in fiscal
1997, the Company had a 33% ownership interest in IGT-NHI. During
fiscal 1997, the Company wrote off the receivables from IGT-NHI,
totaling $401,000 and $1.9 million, respectively. These balances
were substantially reserved in fiscal 1996. At September 30, 1996,
IGT-NHI owed the Company $386,000 on a line of credit and $1.9
million on an equipment loan.
The Company entered into a joint venture agreement with a wholly-
owned subsidiary of Ladbroke Group PLC to form Ladbroke Gaming
Argentina ("LGA") on January 27, 1995. LGA, 50% of which was owned
by the Company, was formed to install gaming machines and conduct
gaming operations within authorized gaming establishments in
Argentina. In May, 1996, the Company sold its investment in LGA,
recognizing a loss of $912,000. No revenues from this joint venture
were recognized in fiscal 1997 or 1996. At September 30, 1997 and
1996, LGA owed the Company $400,000 and $1.6 million, respectively,
with repayment terms of $100,000 per month, for the sale of this
investment. During fiscal 1995, the Company recognized revenues of
$173,000 from sales to LGA.
14. Supplemental Statement of Cash Flows Information
Certain noncash investing and financing activities are not reflected
in the consolidated statements of cash flows. The Company issued
notes or incurred capital lease obligations to obtain property,
plant and equipment in the years ended September 30, 1997, 1996 and
1995 of $12,000, $143,000 and $1.1 million, respectively.
The Company manufactured gaming machines which are used on its
proprietary systems and are leased to customers under operating
leases. As a result, transfers between inventory and property,
plant and equipment totaling $11.0 million, $21.0 million and $11.2
million were made in fiscal 1997, 1996, and 1995, respectively.
The Company had dividends declared, but not yet paid at September
30, 1997, 1996 and 1995, totaling $3.4 million, $3.8 million and
$3.9 million, respectively.
<PAGE>
Notes to Consolidated Financial Statements, (continued)
No common stock was acquired during fiscal 1997 in connection with
stock option exercises. During fiscal 1996 and 1995, common stock
with a cost of $51,000 and $38,000, respectively, was acquired in
connection with stock option exercises for the same amounts. The
stock option exercise price on employee stock options may be paid to
the Company by the employee by submitting previously held common
stock of the Company.
The tax benefit of stock options totaled $278,000, $905,000 and $1.7
million for the years ended September 30, 1997, 1996 and 1995,
respectively.
Payments of interest for the years ended September 30, 1997, 1996
and 1995 were $30.5 million, $26.3 million and $21.3 million,
respectively. Payments for income taxes for the years ended
September 30, 1997, 1996 and 1995 were $97.0 million, $102.1 million
and $91.2 million, respectively.
15. Business Segments
<TABLE>
The Company operates principally in two lines of business: the
manufacture of gaming products and gaming operations. The table
below presents information as to the Company's operations in these
business segments.
<CAPTION>
Years Ended September 30,
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Revenues
Manufacture of gaming products $ 461,150 $ 481,652 $416,424
Gaming operations 282,820 251,800 204,362
Total $ 743,970 $ 733,452 $620,786
Operating Profit
Manufacture of gaming products $ 109,730 $ 115,370 $ 99,054
Gaming operations 114,769 89,887 74,428
Total 224,499 205,257 173,482
Other expense, including interest
expense (11,874) (20,854) (28,718)
Income Before Income Taxes $ 212,625 $ 184,403 $144,764
Capital Expenditures
Manufacture of gaming products $ 4,676 $ 38,420 $ 25,351
Gaming operations 2,255 5,817 7,242
Corporate 26,157 27,338 10,944
Total $ 33,088 $ 71,575 $ 43,537
Depreciation and Amortization
Manufacture of gaming products $ 4,668 $ 3,201 $ 2,855
Gaming operations 19,683 15,846 13,963
Corporate 10,673 11,455 11,078
Total $ 35,024 $ 30,502 $ 27,896
Identifiable Assets
Manufacture of gaming products $ 404,150 $ 402,464 $378,288
Gaming operations 600,918 440,729 292,518
Corporate 209,984 310,994 300,892
Total $1,215,052 $1,154,187 $971,698
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements, (continued)
<TABLE>
The Company's operations are based in the United States and
internationally. The table below presents information as to the
Company's operations by these two regions.
<CAPTION>
Years Ended September 30,
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Revenues
Domestic
Unaffiliated customers $ 601,934 $ 612,071 $564,849
Inter-area transfers 30,455 33,774 21,006
International 142,036 121,381 55,937
Eliminations (30,455) (33,774) (21,006)
Total $ 743,970 $ 733,452 $620,786
Operating Profit (Loss)
Domestic $ 205,331 $ 198,886 $179,389
International 19,168 6,309 (5,644)
Eliminations - 62 (263)
Total 224,499 205,257 173,482
Other expense, including interest
expense (11,874) (20,854) (28,718)
Income Before Income Taxes $ 212,625 $ 184,403 $144,764
Identifiable Assets
Domestic $1,092,317 $1,047,383 $913,011
International 122,735 106,804 58,687
Total $1,215,052 $1,154,187 $971,698
</TABLE>
On a consolidated basis the Company does not recognize intersegment
revenues or expenses upon the transfer of gaming products between
segments. Operating profit is revenue and interest income related
to investments to fund jackpot liabilities less cost of sales and
operating expenses, including related operating depreciation and
amortization, provisions for bad debts, and an allocation of a
portion of selling, general and administrative and research and
development expenses. Other expense includes interest expense,
interest income and gain (loss) on sale of assets.
During the fiscal years ended September 30, 1997, 1996 and 1995, the
Company made net sales of $35.4 million, $61.5 million and $41.0
million, respectively, to Sodak, the Company's principal distributor
of gaming products to Native American reservations. These sales
aggregated approximately 8%, 13% and 10% of the Company's total
product sales for the fiscal years 1997, 1996 and 1995,
respectively. The Company believes the loss of this customer would
not have a long-term material adverse effect on product sales as
other means of distribution to this market are available.
The Company had total export sales from the United States of
approximately $33.6 million, $24.3 million and $12.4 million during
the fiscal years ended September 30, 1997, 1996 and 1995,
respectively.
<PAGE>
Notes to Consolidated Financial Statements, (continued)
<TABLE>
16. Selected Quarterly Financial Data (Unaudited)
<CAPTION>
1997 First Qtr Second Qtr Third Qtr Fourth Qtr
(Dollars in thousands,
except per share amounts and
stock prices)
<S> <C> <C> <C> <C>
Total revenues $189,381 $164,371 $163,849 $226,369
Income from operations 49,774 40,023 41,899 59,741
Net income 33,668 27,714 34,472 41,393
Primary earnings per share $ .27 $ .22 $ .29 $ .36
Stock price
High $ 23 1/2 $ 19 3/4 $ 19 1/8 $ 23 1/4
Low $ 17 5/8 $ 16 1/4 $ 15 3/8 $ 16 1/2
</TABLE>
<TABLE>
<CAPTION>
1996 First Qtr Second Qtr Third Qtr Fourth Qtr
(Dollars in thousands,
except per share amounts
and stock prices)
<S> <C> <C> <C> <C>
Total revenues $156,223 $160,547 $196,635 $220,047
Income from operations 30,674 29,048 51,290 58,821
Net income 27,663 19,370 34,721 36,263
Primary earnings per share $ .21 $ .15 $ .27 $ .30
Stock price
High $ 13 3/4 $ 15 1/8 $ 18 1/4 $ 21 3/8
Low $ 10 3/4 $ 10 3/4 $ 14 1/8 $ 15 1/2
</TABLE>
<TABLE>
<CAPTION>
1995 First Qtr Second Qtr Third Qtr Fourth Qtr
(Dollars in thousands,
except per share amounts
and stock prices)
<S> <C> <C> <C> <C>
Total revenues $159,180 $150,025 $150,775 $160,806
Income from operations 36,736 32,228 34,400 35,977
Net income 25,626 23,062 25,357 18,603
Primary earnings per share $ .19 $ .18 $ .20 $ .14
Stock price
High $ 20 7/8 $ 15 3/4 $ 17 $ 15 7/8
Low $ 14 7/8 $ 12 1/2 $ 12 3/8 $ 13
</TABLE>
<PAGE>
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not applicable.
Part III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Item 13. Certain Relationships and Related Transactions
The information required by Items 10, 11, 12 and 13 is incorporated
by reference from the 1997 Proxy Statement to be filed with the
Securities and Exchange Commission within 120 days of the end of the
fiscal year covered by this report.
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedule and Reports on
Form 8-K
(a)(1) Consolidated Financial Statements:
Reference is made to the Index to Financial
Statements and Related Information under Item 8 in Part II
hereof where these documents are listed.
(a)(2) Consolidated Financial Statement Schedule: Page
VIII Valuation and Qualifying Accounts 65
Other financial statement schedules are either not
required or the required information is included in the
Consolidated Financial Statements or Notes thereto.
Parent Company Financial Statements - Financial Statements
of the Registrant only are omitted under Rule 3-05 as modified by
ASR 302.
(a)(3) Exhibits:
3.1 Articles of Incorporation of International Game
Technology, as amended (incorporated by reference to Exhibit
3.1 to Registrants Report on Form 10-K for the year ended
September 30, 1995).
3.2 Second Restated Code of Bylaws of International Game
Technology, dated November 11, 1987 (incorporated by reference
to Exhibit 3.2 to Registrants Report on Form 10-K for the year
ended September 30, 1995).
4.1 Note Agreement for the 7.84% Senior Notes due September 1, 2004
(incorporated by reference to Exhibit 4.1 to Registrants
Report on Form 10-K for the year ended September 30, 1995).
10.1 Stock Option Plan for Key Employees of International Game
Technology, as amended (incorporated by reference to Exhibit
10.26 to Registration Statement No. 33-12610 filed by
Registrant).
10.2 International Game Technology 1993 Stock Option Plan
(incorporated by reference to Exhibit A to the Proxy Statement
for the 1997 Annual Meeting of Shareholders).
10.3 Employee Stock Purchase Plan
10.4 Employment Agreement with David P. Hanlon, former Chief
Executive Officer, President, Chief Operating Officer, Chief
Financial Officer and Treasurer dated December 1, 1994 and
amendment dated January 1, 1995 (incorporated by reference to
Exhibit 10.8 to Registrants Report on Form 10-K for the year
ended September 30, 1996).
10.5 Employment Agreement with Robert A. Bittman, Executive Vice
President, Product Development dated March 12, 1996
(incorporated by reference to Exhibit 10.9 to Registrants
Report on Form 10-K for the year ended September 30, 1996).
<PAGE>
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K (continued)
10.6 Form of officers and directors indemnification agreement
(incorporated by reference to Exhibit 10.10 to Registrants
Report on Form 10-K for the year ended September 30, 1996).
10.7 Credit Agreement by and among International Game Technology
and the Bank of New York, Wells Fargo and other banks, dated May 22,
1997 (incorporated by reference to Exhibit 10.11 to Registrant's
Report on Form 10-Q for the quarter ended June 30, 1997).
10.8 Employment Agreement with G. Thomas Baker, President, Chief
Operating Officer and Chief Financial Officer dated March 12, 1997.
11 Computation of Earnings Per Share
21 Subsidiaries
23 Independent Auditors' Consent
24 Power of Attorney (See page 65 hereof)
27 Financial data schedule
(b) Reports on Form 8-K
No report on Form 8-K was filed during the three-month period
ended September 30, 1997.
<PAGE>
Power of Attorney
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 12th day of December, 1997.
International Game Technology
By:/s/ G. Thomas Baker
G. Thomas Baker
President, Chief Operating Officer,
and Chief Financial Officer
Each person whose signature appears below hereby authorizes Maureen
Imus and Brian McKay, or either of them, as attorneys-in-fact to
sign on his behalf, individually, and in each capacity stated below,
and to file all amendments and/or supplements to this Annual Report
on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ Charles N. Mathewson Chairman of the Board of December 12, 1997
Charles N. Mathewson Directors and Chief Executive
Officer
/s/ G. Thomas Baker President, Chief Operating December 12, 1997
G. Thomas Baker Officer and Chief Financial
Officer
/s/ Maureen T. Imus Vice President, Finance December 12, 1997
Maureen T. Imus (Principal Accounting Officer)
/s/ Albert J. Crosson Director and Vice Chairman of December 12, 1997
Albert J. Crosson the Board of Directors
/s/ John J. Russell Director December 12, 1997
John J. Russell
/s/ Warren L. Nelson Director December 12, 1997
Warren L. Nelson
/s/ Wilbur K. Keating Director December 12, 1997
Wilbur K. Keating
/s/ Frederick B. Rentschler Director December 12, 1997
Frederick B. Rentschler
/s/ Claudine B. Williams Director December 12, 1997
Claudine B. Williams
/s/Rockwell A. Schnabel Director December 12, 1997
Rockwell A. Schnabel
<PAGE>
SCHEDULE VIII - Consolidated Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Increase (Decrease) Balance
Beginning in at End
of Period Provisions Unrealized Gains of Period
(Dollars in thousands)
<S> <C> <C> <C> <C>
Valuation Allowance on
Investment Securities:
Year ended 9/30/95 $ 998 $ 998 $ 4,461 $4,461
Year ended 9/30/96 $4,461 $ - $ 5,261 $9,722
Year ended 9/30/97 $9,722 $ - $(8,457) $1,265
</TABLE>
<TABLE>
<CAPTION>
Balance at Accounts Balance
Beginning Written at End
of Period Provisions Recoveries Off of Period
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for
Doubtful Accounts:
Year ended 9/30/95 $ 3,956 $2,193 $ 9 $ 976 $ 5,182
Year ended 9/30/96 $ 5,182 $3,968 $139 $3,608 $ 5,681
Year ended 9/30/97 $ 5,681 $4,597 $236 $4,615 $ 5,899
Allowance for
Doubtful Notes and
Contracts Receivable:
Year ended 9/30/95 $13,436 $3,684 $100 $3,606 $13,614
Year ended 9/30/96 $13,614 $7,655 $ 46 $1,540 $19,775
Year ended 9/30/97 $19,775 $4,911 $211 $6,668 $18,229
</TABLE>
<PAGE>
SCHEDULE VIII - Consolidated Valuation and Qualifying Accounts, (continued)
<TABLE>
<CAPTION>
Balance at Balance
Beginning Income Income at End
of Period Deferred Recognized of Period
(Dollars in thousands)
<S> <C> <C> <C> <C>
Income Deferred
under the Installment
Method:
Year ended 9/30/95 $ 587 $ 2,398 $ 2,955 $ 30
Year ended 9/30/96 $ 30 $ - $ 30 $ -
Year ended 9/30/97 $ - $ - $ - $ -
</TABLE>
<TABLE>
<CAPTION>
Balance at Disposed Balance
Beginning of and at End
of Period Provisions Written Off of Period
(Dollars in thousands)
<S> <C> <C> <C> <C>
Obsolete Inventory
Reserve:
Year ended 9/30/95 $13,864 $ 9,159 $ 8,121 $14,902
Year ended 9/30/96 $14,902 $12,064 $ 8,801 $18,165
Year ended 9/30/97 $18,165 $11,381 $14,665 $14,881
Obsolete Fixed Assets
Reserve:
Year ended 9/30/95 $ 325 $ 1,381 $ 1,247 $ 459
Year ended 9/30/96 $ 459 $ (132) $ 327 $ -
Year ended 9/30/97 $ - $ - $ - $ -
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000353944
<NAME> INTERNATIONAL GAME TECHNOLOGY
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 151,771
<SECURITIES> 14,944
<RECEIVABLES> 173,783
<ALLOWANCES> 14,504
<INVENTORY> 92,444
<CURRENT-ASSETS> 571,546
<PP&E> 270,318
<DEPRECIATION> 91,842
<TOTAL-ASSETS> 1,215,052
<CURRENT-LIABILITIES> 164,588
<BONDS> 0
0
0
<COMMON> 95
<OTHER-SE> 519,847
<TOTAL-LIABILITY-AND-EQUITY> 1,215,052
<SALES> 461,150
<TOTAL-REVENUES> 743,970
<CGS> 256,480
<TOTAL-COSTS> 401,725
<OTHER-EXPENSES> 141,300
<LOSS-PROVISION> 9,508
<INTEREST-EXPENSE> 30,422
<INCOME-PRETAX> 212,625
<INCOME-TAX> 75,378
<INCOME-CONTINUING> 137,247
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 137,247
<EPS-PRIMARY> 1.13
<EPS-DILUTED> 1.12
</TABLE>
March 12, 1997
G. Thomas Baker
President/C.O.O.
IGT
5270 Neil Road
Reno, Nevada 89502
Dear Tom:
This letter is written to memorialize our agreement
concerning your compensation package, which replaces and
supersedes our letter agreement dated March 18, 1996.
Effective March 1, 1997, your base salary will be
$450,000 for the period beginning March 1, 1997 and ending
February 28, 1998.
Additionally, your bonus for Fiscal 1997 will be
calculated as follows:
For each 1% increase in operating profits before
incentives over Fiscal 1996, you will receive 10% of your
base salary. This bonus calculation will have a maximum of
200% of base salary (i.e., operating profits before
incentives would increase 20% over Fiscal 1996).
This letter agreement shall extend through February 28,
1998, and it is contemplated that it will be renewed on an
annual basis, subject to approval of the Board of Directors,
and adjustment by the Compensation Committee of the Board of
Directors.
Please acknowledge your acceptance of the terms of this
letter agreement and return to the Legal Department.
Sincerely,
Charles N. Mathewson
Chairman and Chief Executive
Officer
AGREED TO AND ACCEPTED THIS
_____ day of March, 1997
/s/ G. Thomas Baker
G. Thomas Baker
INTERNATIONAL GAME TECHNOLOGY
EMPLOYEE STOCK PURCHASE PLAN
(Composite Plan Document
Incorporating Amendments Through Amendment 1996-1)
<PAGE>
TABLE OF CONTENTS
Page
1. Purpose 2
2. Definitions 2
3. Stock Subject to the Plan 3
4. Grant of Options 3
5. Exercises of Options 6
6. Withdrawal from the Plan 7
7. Termination of Employment 8
8. Restriction Upon Assignment 9
9. No Rights as Shareholder 10
10. Changes in Stock; Adjustments 10
11. Use of Funds; No Interest Paid 10
12. Amendment of the Plan 11
13. Administration by Committee; Rules and
Regulations 11
14. Term; Approval by Shareholders 12
15. Effect Upon Other Plans 13
16. Titles 13
17. Plan Construction 13
<PAGE>
INTERNATIONAL GAME TECHNOLOGY
EMPLOYEE STOCK PURCHASE PLAN
(Composite Plan Document
Incorporating Amendments Through Amendment 1996-1)
1. Purpose. The purpose of the International Game Technology
Employee Stock Purchase Plan (the "Plan") is to assist qualified
employees of International Game Technology (the "Corporation")
and its subsidiaries in acquiring a stock ownership interest in
the Corporation pursuant to a plan which is intended to qualify
as an "employee stock purchase plan" under Section 423 of the
Internal Revenue Code of 1986, as amended (the "Code"). Under the
Plan, eligible employees will be granted options to purchase
shares of the Corporation's no par value Common Stock (the
"Stock"), which shall expire if not exercised in a maximum of 12
months from the date such options are granted, through regular
payroll deductions. The Plan is intended to help employees
provide for their future security and to encourage them to remain
in the employ of the Corporation and its subsidiaries.
2. Definitions.
(a) A "Qualified Employee" means any employee of the
Corporation or of any subsidiary which has been designated
in writing by the Committee as a participating subsidiary
(including any subsidiaries which become such after the date
the Plan was originally approved by stockholders), except
<PAGE>
that the following categories of employees shall be excluded
from participation: (i) any employee who has not completed
at least 12 months of continuous service with the
Corporation or one of its subsidiaries as of the date
options are granted under the Plan, (ii) any employee whose
customary employment is for less than 20 hours per week or
for less than five months in a calendar year, and (iii) any
highly compensated employee (within the meaning of Code
Section 414(q)).
(b) "Base Pay" means the employee's gross pay for a
40-hour week, excluding overtime payments, sales
commissions, relocation or attributed types of compensation,
incentive compensation, bonuses and other special payments,
fees or allowances.
3. Stock Subject to the Plan. Subject to the provisions of
Paragraph 20 (relating to adjustment upon changes in Stock), the
total number of shares to be made available under the Plan is
150,000 shares of no par value Common Stock of the Corporation.
Such shares may be authorized but unissued shares, treasury
shares or shares bought on the market for purposes of the Plan.
4. Grant of Options.
(a) In General. Following the effective date of the
Plan and continuing while the Plan remains in force, the
Corporation will offer options under the Plan to all
eligible employees to purchase shares of Stock. These
options shall be granted once each year on a date to be
determined by the Committee (as defined herein) for
<PAGE>
administration of the Plan (each of which dates is
hereinafter referred to as "date of grant"). The term of
each option shall be 12 months (the "option period") ending
on the last day of the option period (each of which dates is
hereinafter referred to as "date of exercise"). The number
of shares subject to each option shall be the quotient of
(i) the payroll deductions authorized by each participant in
accordance with Subparagraph (b) extended for the option
period divided by (ii) the "option price" (defined below) of
the Stock as defined by Paragraph 5 (b), excluding all
fractions.
(b) Election to Participate; Payroll Deduction
Authorization. Except as provided in Subparagraph (d), an
eligible employee may participate in the Plan only by means
of payroll deduction. Each eligible employee who elects to
participate in the Plan shall deliver to the Corporation
during the calendar month next preceding a date of grant a
written payroll deduction authorization in a form prepared
by the Corporation whereby he gives notice of his election
to participate in the Plan as of the next following date of
grant, and whereby he designates a stated amount to be
deducted from his compensation on each payday and paid into
the Plan for his account. The stated amount may not be less
than a sum which will result in the payment into the Plan of
at least $10.00 each payday. The stated amount may not
exceed either of the following: (i) ten percent of the
amount of Base Pay from which the deduction is made; or (ii)
an amount which will result in noncompliance with the
$25,000 limitation stated in Subparagraph (c). Payroll
deduction authorizations may not be changed during the
option period. In the event the number of shares of Stock
subject to options during an option period shall exceed the
<PAGE>
number of shares available for sale under the Plan for such
period, the available shares shall be allocated among the
participants in proportion to the balance in their account
at the end of the option period.
(c) $25,000 Limitation. No employee shall be granted
an option under the Plan which permits his rights to
purchase Stock under the Plan or any other employee stock
purchase plan of the Corporation or any of its subsidiaries
to accrue at a rate which exceeds $25,000 of fair market
value of such Stock (determined as of the date of grant of
such option) for each calendar year such option is
outstanding. For purposes of this Subparagraph (c), the
right to purchase Stock under an option accrues when the
option (or any portion thereof) becomes exercisable, and the
right to purchase Stock which has accrued under one option
under the Plan may not be carried over to any other option.
(d) Leaves of Absence. During leaves of absence
approved by the Corporation and meeting the requirements of
Regulation Section 1.421-7(h)(2) under the Code, a
participant may continue participation in the Plan by cash
payments to the Corporation on his normal paydays equal to
the reduction in his payroll deductions caused by his leave.
<PAGE>
5. Exercises of Options.
(a) In General. Each eligible employee who is a
participant in the Plan automatically and without any act on
his part will be deemed to have exercised his option on each
date of exercise to the extent that the balance then in his
account under the Plan is sufficient to purchase at the
"option price" (as defined in Subparagraph (b)) whole shares
of Stock subject to his option. Any balance remaining in his
account after payment of the purchase price of those whole
shares shall be refunded to him promptly.
(b) "Option Price" Defined. The option price per share
to be paid by each optionee on each exercise of his option
shall be a sum equal to 85% of the fair market value of
Stock on the date of exercise or on the date of grant,
whichever amount is lesser. If the Stock is listed or
admitted to trading on any stock exchange or exchanges, such
fair market value shall be deemed to be the closing price of
the Stock on the principal stock exchange on which the Stock
is then listed or admitted to trading on the date of grant
or, in the case of valuation on the date of exercise on the
last business day prior to the date of exercise, or if no
sale of the Stock shall have been made on such principal
stock exchange on such day, then the average of the closing
bid and asked prices of the Stock on such exchange on such
day. During such time as such Stock is not listed or
admitted to trading on a stock exchange, the fair market
value per share shall be deemed to be the mean between the
closing representative bid and asked prices of the Stock in
<PAGE>
the over-the-counter market, as reported by NASDAQ or the
National Quotation Bureau, Inc. In the event that the date
of grant does not fall on a business day, such fair market
value shall be determined on the next succeeding business
day.
(c) Delivery of Share Certificates. The Corporation
will deliver to each optionee a certificate issued in his
name for the number of shares with respect to which his
option was exercised and for which he has paid the option
price. The certificate will be delivered as soon as
practicable following the date of exercise. In the event the
Corporation is required to obtain from any commission or
agency authority to issue any such certificate, the
Corporation will seek to obtain such authority. Inability of
the Corporation to obtain from any such commission or agency
authority which counsel for the Corporation deems necessary
for the lawful issuance of any such certificate shall
relieve the Corporation from liability to any participant in
the Plan except to return to him the amount of the balance
of his account.
6. Withdrawal from the Plan.
(a) In General. Any participant may completely
withdraw from the Plan at any time. A participant who
wishes to withdraw from the Plan must deliver to the
Corporation a notice of withdrawal in a form established and
approved by the Corporation. The Corporation, promptly
following the time when the notice of withdrawal is
delivered, will refund to the participant the amount of the
balance in his account under the Plan; and thereupon,
<PAGE>
automatically and without any further act on his part, his
payroll deduction authorization, his interest in the Plan
and his option under the Plan shall terminate.
(b) Eligibility Following Withdrawal. A participant
who withdraws from the Plan shall be eligible to participate
again in the Plan upon expiration of the option period
during which he withdrew.
7. Termination of Employment.
(a) Termination of Employment Other than by Retirement
or Death. If the employment of a participant by the
Corporation and its subsidiaries terminates other than by
retirement or death, his participation in the Plan
automatically and without any act on his part shall
terminate as of the date of the termination of his
employment. The Corporation promptly will refund to him the
amount of the balance in his account under the Plan, and
thereupon his interest in the Plan and option under the Plan
shall terminate. Nothing in this Plan shall prevent the
Corporation or any subsidiary of the Corporation from
terminating any employee's employment.
(b) Termination by Retirement. A participant who
retires on his normal retirement date, or earlier or later
with the consent of the Corporation, may, at his election,
either (i) by written notice to the Corporation exercise his
option as of his retirement date, in which event the
Corporation shall apply the balance in his account under the
Plan to the purchase at the option price of whole shares of
<PAGE>
Stock and refund the excess, if any, or (ii) by written
notice to the Corporation request payment of the balance in
his account under the Plan, in which event the Corporation
promptly shall make such payment, and thereupon his interest
in the Plan and his option under the Plan shall terminate.
If the participant elects to exercise his option, the date
of his retirement shall be deemed to be a date of exercise
for the purpose of computing the option price of the Stock.
(c) Termination by Death. If the employment of a
participant is terminated by his death, the executor of his
will or the administrator of his estate by written notice to
the Corporation may either (i) exercise his option as of the
date of his death, in which event the Corporation shall
apply the balance in his account under the Plan to the
purchase at the option price of whole shares of Stock and
refund the excess, if any, or (ii) request payment of the
balance in his account under the Plan, in which event the
Corporation promptly shall make such payment to his estate,
and thereupon his interest in the Plan and his interest in
his option under the Plan shall terminate. If the option is
exercised, the date of his death shall be deemed to be a
date of exercise for the purpose of computing the option
price of the Stock. If the Corporation does not receive such
notice within 90 days of the participant's death, the
participant's representative shall be conclusively presumed
to have elected alternative (ii) and requested the payment
of the balance of his account to his estate.
8. Restriction Upon Assignment. An option granted under the
Plan shall not be transferable otherwise than by will or the laws
of descent and distribution, and is exercisable during the
<PAGE>
optionee's lifetime only by him. An option may not be exercised
to any extent except by the optionee or as provided in Paragraph
7(c). The Corporation will not recognize and shall be under no
duty to recognize assignment or purported assignment by an
optionee of his option or of any rights under his option.
9. No Rights as Shareholder. With respect to shares of Stock
subject to an option, an optionee shall not be deemed to be a
shareholder and shall not have any of the rights or privileges of
a shareholder. An optionee shall have the rights and privileges
of a shareholder when, but not until, a certificate for shares
has been issued to him following exercise of his option.
10. Changes in Stock; Adjustments. In the event that shares of
Stock shall be changed into or exchanged for a different number
or kind of shares of stock or other securities of the Corporation
or of another corporation (whether by reason of merger,
consolidation, recapitalization, stock split, combination of
shares, or otherwise), or if the number of shares of Stock shall
be increased through a stock split or the payment of a stock
dividend, then there shall be substituted for or added to each
share of Stock then reserved for sale under the Plan and any
outstanding Option, the number and kind of shares of stock or
other securities into which each outstanding share of Stock shall
be so changed, or for which each such share shall be exchanged,
or to which each such share shall be entitled, as the case may
be.
11. Use of Funds; No Interest Paid. All funds received or held
by the Corporation under the Plan will be included in the general
funds of the Corporation free of any trust or other restriction
<PAGE>
and may be used for any corporate purpose. No interest will be
paid to any participant or credited to his account under the
Plan.
12. Amendment of the Plan. The Board of Directors of the
Corporation may amend, suspend or terminate the Plan at any time
and from time to time; provided, however, that, without approval
of the Corporation's shareholders given within 12 months before
or after action by the Board; the Board may not amend the Plan:
(a) To increase the maximum number of shares subject
to the Plan; or
(b) To change the designation or class of employees
eligible to receive options under the Plan.
13. Administration by Committee; Rules and Regulations. The
Plan shall be administered by a committee composed of not less
than two directors of the Corporation (the "Committee"), each of
whom in respect of any transaction at a time when the affected
participant may be subject to Section 16 of the Securities and
Exchange Act of 1934 ("Exchange Act"), shall be a "Non-Employee
Director" within the meaning of Rule 16b-3(b)(3). Each member
shall serve for a term commencing on a date specified by the
Board of Directors and continuing until he dies or resigns or is
removed from office by the Board of Directors. The Committee
shall have the power (a) to make, amend and repeal rules and
regulations for the interpretation and administration of the Plan
consistent with the qualification of the Plan under Section 423
<PAGE>
of the Code and (b) subject to the provisions of Paragraph 12(b),
to designate present or future subsidiaries of the Corporation
whose employees may participate in the Plan.
14. Term; Approval by Shareholders. No option may be granted
during any period of suspension nor after termination of the
Plan, and in no event may any option be granted under the Plan
after the first to occur of the following events:
(a) The expiration of ten years from the date the Plan
was adopted by the Board of Directors;
(b) The expiration of ten years from the date the Plan
is approved by the Corporation's shareholders; or
(c) The date on which all of the stock available under
the Plan has been purchased.
The Plan will be submitted for the approval of the
Corporation's shareholders within 12 months after the date of the
Board's initial adoption of the Plan. Options may be granted
prior to such shareholder approval; provided, however, that such
options shall not be exercisable prior to the time when the Plan
is approved by the shareholders and provided, further, that if
such approval has not been obtained by the end of said 12-month
period, all options previously granted under the Plan shall
thereupon be cancelled and become null and void.
<PAGE>
15. Effect Upon Other Plans. The adoption of the Plan shall not
affect any other compensation or incentive plans in effect for
the Corporation or any subsidiary. Nothing in this Plan shall be
construed to limit the right of the Corporation or any subsidiary
(a) to establish any other forms of incentives or compensation
for employees of the Corporation or any subsidiary or (b) to
grant or assume options otherwise than under this Plan in
connection with any proper corporate purpose, including, but not
by way of limitation, the grant or assumption of options in
connection with the acquisition, by purchase, lease, merger,
consolidation or otherwise, of the business, stock or assets of
any corporation, firm or association.
16. Titles. Titles are provided herein for convenience only and
are not to serve as a basis for interpretation or construction of
the Plan.
17. Plan Construction. It is the intent of the Corporation that
transactions in and affecting options in the case of participants
who are or may be subject to the prohibitions of Section 16 of
the Securities and Exchange Act of 1934 ("SEC Section 16")
satisfy any then applicable requirements of 17 C.F.R. 240.16b-3
(hereinafter known as Rule 16b-3) so that such persons (unless
they otherwise agree) will be entitled to the exemptive relief of
Rule 16b-3 in respect of those transactions and will not be
subjected to avoidable liability thereunder. Accordingly, this
plan shall be deemed to contain, and such options shall contain,
and the shares issued upon exercise thereof shall be subject to,
such additional conditions and restrictions as may be required by
Rule 16b-3 to qualify for the maximum exemption from SEC Section
16 with respect to plan transactions. If any provision of this
<PAGE>
plan or of any option would otherwise frustrate or conflict with
the intent expressed above, that provision to the extent possible
shall be interpreted as to avoid such conflict. If the conflict
remains irreconcilable, the Committee may disregard the provision
if it concludes that to do so furthers the interest of the
Company and is consistent with the purposes of this plan as to
such persons in the circumstances.
EXHIBIT 11
<TABLE>
INTERNATIONAL GAME TECHNOLOGY
COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Primary Shares Outstanding:
Common Stock Outstanding at
Beginning of Period 150,690,308 150,118,534 149,465,774
Shares Issued Under Stock Option
and Award Plans 1,192,402 571,774 652,760
Percentage of Time Outstanding 72.0% 48.3% 37.7%
Weighted Average Shares
Outstanding 858,517 276,130 245,993
Shares Purchased and Held in
Treasury (38,174,676) (25,114,476) (21,268,046)
Percentage of Time Outstanding 80.8% 96.1% 91.7%
Weighted Average Shares
Outstanding (30,833,808) (24,134,721) (19,513,289)
Common Stock Equivalent of
Options Outstanding 1,113,954 1,152,379 895,093
Weighted Average Number of
Primary Common and Common
Equivalent Shares Outstanding 121,828,971 127,412,322 131,093,571
Fully Diluted Shares Outstanding:
Additional Dilutive Effect of
Stock Options 561,095 748,139 0
Weighted Average Number of Fully
Diluted Common and Common
Equivalent Shares Outstanding 122,390,066 128,160,461 131,093,571
Net Income 137,247 118,017 92,648
Primary Earnings Per Share:
Net Income 1.13 0.93 0.71
Fully Diluted Earnings Per Share:
Net Income 1.12 0.92 0.71
</TABLE>
EXHIBIT 21
INTERNATIONAL GAME TECHNOLOGY SUBSIDIARIES
NAME JURISDICTION OF INCORPORATION
International Game Technology Nevada
IGT Nevada
IGT-Colorado Corporation Colorado
Fortune Advertising & Marketing Nevada
IGT-Montana, Inc. Montana
Megasports, Inc. Nevada
IGT NHI Joint Venture Company Nevada
I.G.T. (Australia) Pty. Limited New South Wales, Australia
I.G.T. (Manufacturing) Pty. Limited New South Wales, Australia
I.G.T. (New Zealand) Limited New Zealand
IGT-Europe B.V. The Netherlands
I.G.T. - Argentina S.A. Argentina
IGT Japan, K.K. Japan
IGT - Iceland Ltd. Iceland
IGT do Brasil Ltda. Brazil
International Game Technology -
Africa (Proprietary) Limited Johannesburg, South Africa
IGT Foreign Sales Corporation Barbados
International Game Technology S.R.
Ltda. Peru
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration
Statement Nos. 2-754843, 2-91475, 33-20308, 33-27657, 33-69400 and
33-63608 on Form S-8 of our report dated November 7, 1997,
appearing in this Annual Report on Form 10-K of the International
Game Technology for the year ended September 30, 1997.
DELOITTE & TOUCHE LLP
Reno, Nevada
December 12, 1997
